Rising insurgency in Iraq is threatening the world’s two largest oil fields Rumaila and West Qurna-2, and pulled down the jittery bourses round the world on Thursday. The radical Iraqi insurgents with close Al-Qaeda ties seized the northern city of Kirkuk on the same day and are heading toward Baghdad. Wednesday too witnessed militants from Islamic State in Iraq and Syria, or ISIS, taking control of the northern Iraqi cities Mosul and Tikrit.
The direct fallout of these geo-political developments was a spike in Brent crude prices around a nine-month high to about $113 per barrel from the below $110 barrel mark for most of May. In this tense situation, we are apprehensive that the Brent price could even be pushed up to around $122 per barrel.
Apart from that, quite a few energy behemoths have significant presence in Iraq. The list includes publicly traded integrated majors like Exxon Mobil Corporation (XOM), BP plc (BP), Royal Dutch Shell plc (RDS.A) and Chevron Corporation (CVX). Consequently, a large share of investors’ wealth is at the mercy of volatile middle-eastern geo dynamics.
Market Reaction
The three major market indices S&P 500, the Dow and the Nasdaq gained 2.1%, 0.8% and 3.1%, respectively, in the past one month. However, the positive trend has already started to buckle under flared up oil prices and softer-than-expected domestic economic data. At the close of U.S. trading on Thursday, the Dow 30, S&P 500 and NASDAQ Composite index fell 0.65%, 0.71% and 0.79%, respectively.
Where is the Basket to Put My Money
This puts investors at a fix as to where to look for value. After all, the fortunes of a number of sectors are invariably tied to oil. In such a volatile market, risk-averse investors may scurry toward Treasury bills, notes and securities issued by government agencies. However, with the basis differential between five and 30-year bond yields at its narrowest since Sep 2009, we see little incentive for investors to pour their money into those now.
Let's look at some companies that have their fortunes closely untied to the geo-political game of oil.
As we know oil shares an inverse relationship with its bête noire, alternative energy. From this pack an interesting choice is JA Solar Holdings Co., Ltd. (JASO) which holds the largest capacity for manufacturing solar cells. We feel the sharp rise in oil prices would result in a number of new solar projects to generate cheap power. The Zacks Rank #1 (Strong Buy) stock occupies a prime position to pump out solar cells to cater to those projects.
Secondly, Given rising transportation costs, people may focus more on telecommute work from home. Here, among quite a few of our favorite stocks, Microsoft Corp (MSFT) with Skype in its pocket quickly comes to our mind. The Redmond, WA-based company is one of the largest software developers in the world. Its operating systems are installed almost ubiquitously. The reorganization of the business and “cloud-first mobile-first” focus also encourage our bullishness.
Finally, investors may choose to veer away from the energy domain and focus their gaze on the unrelated consumer staples space. Here our current favorite is the Tupperware Brands Corporation (TUP). Over the years, the company has been able to leverage its strong brand name and expand from its original food storage offerings to other related product categories. The Zacks Rank #2 (Buy) stock has a unique and long-standing distribution strategy which along with its stable dividend paying history and cheap valuations provide investors to veer away completely from the ongoing oil tussle.
In Conclusion
The fight over oil seems to be a major threat over Obama’s climate change plan. As Obama battles Republican majority in the House of Representatives, the only solace is the wafer-thin majority of Democrats in the Senate. However, any political misstep on his part may well give the Republicans the needed half a dozen seats in the Senate, ending the Democratic majority there too.
If this happens, it would bring a fair share of opposition to the Environmental Protection Agency’s (EPA) carbon rule, proposed earlier this month. The proposal stipulates state-wise limitation on carbon dioxide emission that aims to reduce the national level by 17% from the current level by 2030.
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