Oil prices are inching up on heightened tensions in Iraq. While some traders may have been caught off guard, investors can utilize exchange traded funds to capture market areas that could benefit from higher oil prices.
The price of crude oil has been relatively stable in recent years, staying within range as political volatility in the Middle East remained subdued and shale oil production in the U.S. bolstered supplies.
However, the escalating violence in Iraq has pushed oil prices to their highest level in nine months, reports John Authers for Financial Times.
In early Wednesday, Islamic extremists was said to have taken Iraq’s largest oil refinery, reports Rod Nordland for the New York Times.
West Texas Intermediate crude oil futures are now hovering around $106.2 per barrel.
Consequently, with the risk of greater supply disruptions in Iraq, investors can take a look at their equity positions to hedge against risks in the oil market.
For example, Russian stocks, namely government-backed oil giant Gazprom or Lukoil, can benefit from the uncertainty. According to Absolute Strategy Research, markets that have shown a positive correlation of 50% or more to oil prices include Russian stocks, along with Norwegian and Polish equities.
The Market Vectors Russia ETF (NYSEArca: RSX), the largest and most heavily traded Russia ETF, has a heavy 40.2% tilt toward the energy sector, with a 8.5% weight in Gazprom and 8.1% in Lukoil. Rival iShares MSCI Russia Capped ETF (NYSEArca: ERUS) has a 55.4% weight in the energy sector, including Gazprom 21.0% and Lukoil 12.6%. RSX has a 0.63% expense ratio and ERUS has a 0.61% expense ratio. [Putin Pause Stokes Inflows to Russia ETFs]
ETF investors can track Norway’s markets through he Global X Norway 30 ETF (NYSEArca: NORW) and iShares MSCI Norway Cppd Investable Mkt (BATS: ENOR). NORW has a 0.50% expense ratio and ENOR has a 0.53% expense ratio.
The iShares MSCI Poland Capped ETF (NYSEArca: EPOL) and the Market Vectors Poland ETF (NYSEArca: PLND) both provide exposure to Polish stocks. EPOL and PLND both have a 0.61% expense ratio. [The Selective Approach to Eastern Europe ETFs]
On the other side of the spectrum, global retail is the most negatively correlated to oil price gains at -72%, which makes sense since higher oil prices means consumers are paying more for oil and less on other goods. Additionally, healthcare, telecom, food, beverages, travel and leisure all show negative correlations to oil prices by more than 60%. If the Iraq situation is resolved and the risk premium in oil prices abates, investors may begin to turn back to these market sectors.
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Max Chen contributed to this article.