Everyone realizes that in an oil price shock scenario, every equity is going to take it on the chin, says Credit Suisses Stuart. Investors who normally wouldnt trade the underlying commodity are purchasing options, futures and ETFs, he adds: Buy a position that an oil price shock would deliver some profit on.
Oil hasnt lost its power to shock. Last month Credit Suisse published a report examining the effect of oil prices on equities and economies. For reasons including a resilient U.S. consumer, the authors argued that Brent crude oil would need to hit a record high of $150 a barrel this year before it would cut into economic growth. As of March 23, Brent was trading at about $124, in line with Credit Suisses previous estimate of a sustainable price. Its about oil price shocks more than about oil price level as to what is hurtful to an economy, says Jan Stuart, the banks New Yorkbased head of energy research. After studying options prices, New York exchange-traded fund sponsor Factor Advisors recently gave West Texas Intermediate crude a 30 percent chance of reaching $150 this year and the same bearish odds that it would retreat to its 2011 low of about $75. The most obvious driver of the bullish scenario is a possible U.S. or Israeli attack on Iran, says CEO Stuart Rosenthal.