Oil: Thinking the unthinkable

Perhaps the biggest question this year and this decade is whether we are witnessing a major political change in the Middle East and North Africa.

It is a critical question because if we are, then the world is potentially going to be a very different place to what it has been for the past 50 years. The Middle East accounts for more than 60 per cent of world oil reserves, of which more than 20 per cent is in Saudi Arabia: no other region comes close.

History would suggest that once political change starts it is very hard to stop. The West, especially the US, has championed democracy but supported non-democratic regimes for decades.

If the Middle East continues to see political changes in more and more countries, (and this change could take a number of different forms) the West and US will find their old-style foreign policies in tatters, if they aren’t already.

However, the view seems to be that the only country to worry about is Saudi Arabia, and here the expectation is that the US will step in to secure the oil supply. What is more, the Saudi military is well trained and well equipped – true. But if there is a crisis and military intervention either from the Saudi military or the US or both is needed, I don’t believe the oil price will stay at $114. Furthermore, political turmoil in countries other than Saudi Arabia such as Syria could become a cause of concern.

If the oil supply is disrupted or seems vulnerable, the search for new oil fields will intensify and demand for oil services will escalate, because there is as yet no real alternative. We could see North Sea oil, which is having a renaissance, receive more investment and perhaps special tax treatment, while reserves in safe locations around the world will trade at premiums. Safe locations hold about 30 per cent of the world’s oil reserves.

With the potential for major upheaval it may be worth looking at carbon-focused energy funds, but as a quick search on Trustnet shows, there are very few – interestingly there are far more "new" energy funds.

In the IMA Specialist sector, there are three funds: Investec Global Energy, CF Junior Oils and Blackrock World Energy. CF Junior Oils invests exclusively in smaller oil stocks. The other two funds have broader mandates but are heavily invested in oil companies: the integrateds, exploration companies, those that specialise in drilling, oil services and refining.

An alternative way to play this theme is via an exchange traded fund and searching on Trustnet shows that the universe opens up and includes leverage and short options.

Another option is Artemis, which is about to launch an energy fund to capitalise on a sector where it clearly sees significant opportunities and this is without a political dimension. This fund will seek opportunities in the energy sector focused on the dominance of fossil fuels.

The downside is that a significantly higher oil price that remains elevated for any length of time will result in slower global economic growth.

Those economies most dependent on oil will be hit hardest and inflation will become a serious problem. It is possible that another 1970s type oil shock is around the corner; if so, an oil-focused energy fund may provide some insurance against this.

Tim Cockerill is head of collectives research at Ashcourt Rowan. The views expressed here are his own.