Tuesday, 15 November 2011 00:00

$200 for a Barrel of Oil? Nah...

The Financial Times warns about the gloomy perspective of pricing the barrel of crude at $200. The prognosis indicates that potential escalation between Iran and Israel may stampede the markets and the oil industry into chaos. "After all, Iran is the world's third-largest exporter of oil (after Saudi Arabia and Russia), so any shutdown of oil production in that country would create a sharp shock in the tenuous balance between supply and demand."

However, the $200 per barrel remains a myth. Not likely to happen any time soon, if at all.  

From a military point of view, Israel would applaud a US strike against Iran's nuclear facilities. It is not even clear if Israel alone can deal with all the targets, distributed over a vast territory. A multiple strikes solution indicates an American involvement. And the White House, at least during the current Administration, is unlikely to launch a strike against Iran. 

The global economy would enter recession if the barrel touched $125, much lower than $200 (talking here about the West Texas Intermediate crude prices, which currently fetch about $95 per barrel. Brent Crude, a European benchmark, is typically about $20 higher).

As expected, higher prices for crude will affect investment stocks for automakers such as Ford (NYSE: F) and GM (NYSE: GM) as well as airline carriers such as Delta Airlines (NYSE: DAL), Southwest Airlines (NYSE: LUV) and American Airlines parent AMR (NYSE: AMR). Already trading for low profit, the airline stocks may turn into losses. "So investors shouldn't take current price-to-earnings (P/E) ratios as a basis for investment quite yet. Indeed, a move above $100 for oil would set off selling pressure in these sectors."

During the last oil spike, trucking firms had to pass on the big increases in diesel fuel prices with fuel surcharges. In response, their clients aggregated more shipments together (resulting in less numerous trips). This forced few firms, like YRC Worldwide (Nasdaq: YRCW) to the brink of bankruptcy, with most other trucking firms shifting from profits to losses.

"It's time to stress-test of all your holdings to see whether they are heavily exposed to crude oil. You can hedge the exposure to oil by buying the Barclays iPath S&P GSCI Crude Oil TR Index fund (NYSE: OIL), which would gain in step with oil prices. More broadly, you need to closely monitor oil prices in coming weeks. If they keep rising, then it's time to question whether the U.S. economy can avoid a recession in 2012, which would have far-reaching implications for a wider range of stocks."

Disclosure: Neither D. Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

Source: Higher Oil Prices Could Punish these Stocks


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