Impact of Middle East tensions—oil prices and equity portfolios (Part 1 of 3)
With turmoil in the Middle East dominating headlines, many investors are wondering what the recent and growing unrest in the region means for oil prices and for equity portfolios. Russ explains why oil prices are likely to remain elevated for the foreseeable future and why there’s a strong case for sticking with energy stocks even if oil prices don’t spike.
With turmoil in the Middle East dominating headlines, many investors are wondering what the recent and growing unrest in the region means for oil prices and for equity portfolios.
In my new Market Perspectives piece, “Oil’s Precarious Balance,” I provide my take: While I certainly can’t predict the outcome of events in the Middle East, oil prices are likely to remain toward the upper end of their recent range for the foreseeable future given current supply and demand dynamics. Even without a sustained spike in oil prices, there’s a strong case for sticking with energy stocks simply based on valuations.
Market Realist – The graph above shows the West Texas Intermediate (or WTI) crude oil prices in 2014. Despite the energy renaissance in the U.S. and increasing energy efficiency in most developed countries, the prices remain elevated in 2014. This could be attributed to the growing demand of energy (XLE) and the constraints on supply of oil (XOP) due to rising geopolitical tensions.
The energy sector has outperformed the broader market indices like the S&P 500 (SPY) (or IVV), the Dow Jones Industrial Average (DIA), and NASDAQ (QQQ) this year due to heightened geopolitical risks. According to Russ, the valuations remain attractive at a 15% discount to broader market indices. This makes energy stocks a good investment opportunity.
Continue reading the next part in the series to understand future expectations for the energy sector.
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