Breakout

Energy Market Volatility: How to Play Crude Oil & Natural Gas Now

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It's been a wild ride in the energy market this week with crude oil whipsawing around the $100 a barrel mark and natural gas continuing its slide toward ten-year lows. There are several market forces at play keeping volatility high and investors weary.

Tensions over Iran's nuclear development and subsequent threats to close off the Strait of Hormuz has kept oil above $100 a barrel over the last month. But reports that Europe will delay an embargo on Iranian oil imports on Thursday afternoon sharply reversed the short-term trend, sending crude lower by 1.8% to $99.10/barrel.

"20% of the world's oil supply comes through those Straits every day, and any type of restriction on that supply could have a significant impact particularly on Japan and China," says Frank Holmes, CEO of U.S. Global Investors. "Who benefits, is Russia; Russia is the largest exporter of oil, and they would benefit from rising prices."

Holmes says if Europe does ban Iranian oil imports, the impact won't be harsh because high global demand will soak up any extra supply on the market very quickly. He points to Japan, China and even Africa has hungry buyers of crude.

"When you look at Africa, it doesn't have the debt problems that you're experiencing in Europe and the economy has been growing at a 7% cash-on-cash GDP growth rate," Holmes says.

As for natural gas, the warmer than average winter weather has pressured this abundant commodity, now trading below $2.70/BTU. Holmes believes "great American ingenuity" will help revive this energy resource. He'd like to see new technology and processes to reach our gas resources, and maybe also find more oil in doing so.

In the meantime, doesn't recommend buying the commodities directly, and instead likes energy stocks.

"Infrastructure plays on building pipelines will continue to be important, especially gas pipelines," Holmes says. "And we further believe that chemical companies that are in the U.S. --where input is gas and output is a plastic-- they're going to benefit from expanding profit margins. Also oil sands."

Bottom line: "It really is a non-event for oil to go between 15% - 30% volatility," says Holmes. There are opportunities in energy if you have the stomach for major price swings.

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