From the Editor: You're getting special access to Bill Patalon's latest Private Briefing because the situation in Syria is escalating by the hour, and a U.S. strike would have a significant and immediate impact on stocks, but an even bigger impact on oil. So Bill called the one man who'd know exactly what to do...
Oil prices have been surging on fears that the Obama administration is planning to punish Syria for using chemical weapons against its own people.
But the real question is whether this escalation in "black gold" prices is going to continue.
As we'll see in a minute, our in-house energy expert - the noted Dr. Kent Moors - believes that oil prices are headed much higher.
And he has lots of company.
Oil prices hit their highest levels in two years yesterday after NBC News reported that the Obama administration is "past the point of [no] return" because of reports that Syria used chemical weapons against its own people.
And that means that military strikes against Syria could occur "within days," the network reported.
West Texas Intermediate (WTI) crude rose to nearly $110 a barrel, its highest level since May 2011. And Brent crude - the global benchmark - hit a six-month high north of $117 a barrel.
Whether this energy-price surge keeps going, of course, is dependent on how hard the U.S. hits Syria - as well as what happens afterward.
But there's a growing belief that oil prices are fated to climb much higher before this latest global mess is resolved.
LandColt Capital's Todd Schoenberger grabbed some headlines yesterday when he said on Yahoo! Finance's Breakout program that a protracted conflict in Syria will cause oil prices to challenge their 2008 record highs of $147 a barrel - creating an energy price spike that, not surprisingly, would kill the European "recovery" before it reaches sustainable status.
That will be great for energy investors, as well as for gold prices, he said.
Looking back, you can see how we got to this point.
Syria was under "emergency law" from 1963 to 2011 - a move that essentially crushed constitutional protections for the country's citizens.
But that changed with the "Arab Spring." Since March 2011, the Syrian Arab Republic has been involved in a bloody civil war - ignited by uprisings that experts say were inspired by the regional revolts against oppressive regimes pundits called the Arab Spring.
Uprisings against Syrian President Bashar al-Assad and the neo-Ba-athist government have turned into a bloody series of engagements that culminated with last week's alleged chemical attacks that reportedly left hundreds dead in the Damascus suburbs.
The Obama administration is said to be looking at launching air strikes or cruise-missile attacks that would keep Syria from again using chemical weapons (considered a "weapon of mass destruction," or WMD). But Washington wants to avoid having Damascus retaliate in a way that escalates the conflict and perhaps leads to a broader war in the Middle East.
For instance, there are very real worries that Syria or that country's allies might then attack Israel. That would force Israel to retaliate, bringing the Jewish state into the conflict and putting the United States into a very tough spot from the vantage point of Middle East diplomacy.
And with many experts believing that President Assad will be able to "ride out" U.S. reprisals that are limited to air strikes, there are worries that U.S. President Barack Obama might consider an even more concerted - and prolonged - attack on Syria.
Any kind of escalation will roil the financial markets. Mike Wittner, global head of oil research at Societe Generale, told clients that a spreading conflict could easily drive Brent crude up to $150 a barrel.
"Our big worry is Iraq," Wittner wrote. "The Sunni vs. Shiite conflict in Syria has a direct parallel in Iraq, and the violence in Iraq has reached levels not seen since 2008. Iran, who is Syria's only state ally in the region (Syria is also allied with Russia and with the Lebanon-based Hezbollah militant group), may choose to stir up...attacks [on oil production and transport facilities] in order to hurt the economies of the Western countries by causing an oil price spike."
Kent, who runs our Energy Advantage advisory service and is our resident energy expert here at Money Map Press, also happens to be one of the best-connected insiders in the world energy sector today. He says investors should prepare themselves for the volatility and continued surges in energy prices that will result from any prolonged conflict.
And he also made an excellent point that I haven't seen many of the other "experts" zero in on: It's not enough to just remove Syrian President Assad: There also has to be a plan to somehow fill the leadership "vacuum" that will result from his ouster.
"Bill, it goes without saying that we've experienced noticeable gains in West Texas Intermediate (WTI) and Brent futures contract prices, as well as a spike in the RBOB ("Reformulated Blendstock for Oxygenate Blending," the New York Mercantile Exchange-traded gasoline futures contract) - all attesting to the uncertainty rising in the oil and oil products markets," Kent told me in an e-mail yesterday. "These price levels are likely to remain elevated unless the conflict ebbs. And there is no signal this will be happening anytime soon. Remember, removing Assad is only the first step. Somehow stability has to return after his departure, and there is no ready roadmap on how that is to happen."
It's no surprise that energy producers - both companies and countries - gladly pay fortunes to hear what Kent thinks. I asked him for some simple moves you could make to protect yourself - and perhaps even profit.
Longtime [Private Briefing] subscribers will see that two of the three are already in the portfolio. But they're all worth mentioning again.
- The United States Gasoline Fund LP (NYSEArca: UGA), which will mirror the rise in U.S. gasoline prices. Through the close yesterday, UGA is up 3.4% for the week. But that will continue as energy prices continue their escalation.
- The United States Brent Oil Fund LP (NYSEArca: BNO), which reflects the price of Brent in London.
- And the PowerShares DB Energy Fund (NYSEArca: DBE), which will allow you to play the differential between WTI and Brent, as well as some "crack spreads" that compare oil products with the actual crude.
"Both the BNO and the DBE will be increasing following any military action for one very simple reason: An accentuation of the Brent-WTI spread is likely to result," Kent explained. "That's because Middle East events like the impending attack on Syria effect European oil balances far more quickly than those of North America or Asia. Brent prices should be increasing faster than WTI. At close yesterday, the spread had increased to 5.1% of the WTI price (the better way of calculating it) from 4.5% the day before. "
One final point, Kent offered. A widening spread is also likely to benefit refinery shares - including Valero Energy Corp. (NYSE: VLO), which he recommended to Private Briefing subscribers as his top pick for 2013.
"The caveat, of course, is that a large market drop like the one we had earlier this week will put initial downward pressure on refiners," he said. "But the Syrian situation will benefit them otherwise."
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.