Short-term punts for the adventurous investor: Crude oil
In the next instalment of the monthly series, Platinum Financial Services’ Harpreet Sajjan highlights an ETF that he believes is set for a spike in performance.
Crude oil prices rebounded sharply this week as tensions in the Middle East, especially between Syria and Turkey, began to reach boiling point.
Oil prices in general fell significantly over summer when problems in the Middle East seemed to have calmed and concerns about global economic growth and demand weighed on US and European stock markets, which ultimately filtered through to world energy prices taking a hit.
The chart below shows the performance of the ETFs Leveraged Crude Oil since 1 January this year:
Performance of ETF year-to-date
Source: FE Analytics
Prices are trading significantly lower now than they were a year ago and are close to their year-low in June.
I believe this provides a good buying opportunity for the adventurous investor who is able to stomach the current volatility in the crude oil market.
New York's main contract, light sweet crude for November, hiked upward this week and in London Brent North Sea Crude for delivery in November jumped $2.68 to settle at $114.50 a barrel on Monday alone.
It is clear then that short-term futures have priced in a rise in oil prices in both major trading centres.
Many believe that this is a geopolitical risk story and that the prime factors driving current prices are escalating tensions between Turkey and Syria – with potential for war emerging between the nations and threatening supply as a result.
NATO head Anders Fogh Rasmussen this week warned that the conflict in Syria could escalate.
He said alliance member Turkey had shown commendable restraint in response to the shelling of its border area, where five of its citizens were killed; this was despite the fact it sparked a series of retaliatory strikes.
There are certainly concerns over the demand for oil however, particularly in the longer-term.
Saudi oil minister Ali al-Naimi warned that rising oil prices would affect economic growth across the globe, mainly in developing economies. This had little impact on prices, which in turn raised concerns of falling oil demand.
Further to this, the International Monetary Fund (IMF) and World Bank slashed their 2012 growth forecasts, again a negative for oil demand.
The IMF cut its prediction for Chinese economic growth this year to 7.8 per cent, while the World Bank said it expected the world's second-largest economy and biggest energy consumer to grow at 7.7 per cent, which was slower than previously expected.
However in the coming month, and if talks of war ensue in the Middle East, the price of oil will surge. ETFs Leveraged Crude Oil is well poised as a short-term hold for the speculative investor seeking to take quick profit from the current crude oil price discrepancy.
Harpreet Sajjan is head of portfolio management at Platinum Financial Services. The views expressed here are his own.
In the last article in the series, Sajjan recommended ETFS Leveraged Lean Hogs. Since 17 September when the article was published, it has risen by 14.03 per cent in sterling terms.