A CIO overseeing $1 billion shares why investors are underpricing oil by as much as 19% — and 4 ways to bet on the asset
Oil tankers pass through the Strait of Hormuz
Oil prices have fallen as much as 17% since April, when tensions between Israel and Iran rose as the two countries exchanged blows, sending the price of oil surging.
While the conflict has seemingly cooled off since then, Ben McMillan, the CIO of IDX Advisors who runs the IDX Commodity Opportunities Fund (COIDX), thinks the risk of conflict in the Middle East is still very much present, and investors are underappreciating the prospect of tensions flaring again. Oil prices tend to jump when geopolitical tensions heat up, as the supply of the commodity can take a hit due to production and delivery hiccups.
In a call with B-17 earlier this month, McMillan said that investors are underpricing oil futures by as much as 19%, and that the price of crude oil could surge as high as $95 per barrel from its current levels near $80. By the end of the year, he said, he wouldn’t be surprised to see it rise to $85 per barrel.
“Even the threat of geopolitical tension — you don’t even necessarily need something to happen,” McMillan said. “In the Persian Gulf, specifically as it relates to supply-side disruptions, just the threat of it could send oil prices back up.”
Threats to McMillan’s outlook include a slowing global economy, especially in China, which is translating to lower demand for oil, and OPEC potentially not sticking to its plan of supply cuts to support oil prices.
But the risk of conflict in the Middle East outweighs these dampers to oil prices, in McMillan’s opinion. Fighting between Israel and Iran could disrupt a major oil shipping route: the Strait of Hormuz between the Persian Gulf and the Gulf of Oman. The strait is bordered by Iran, the United Arab Emirates, and Oman.
“There are all kinds of logistical reasons for why that strait is vulnerable to any kind of attack or disruption,” McMillan said. “Given the fact that markets aren’t really pricing in any kind of premium for that, I think that’s a tail risk that’s kind of underappreciated in the market right now.”
4 ways to bet on oil
McMillan shared a few ways he invests in oil. One is simply through oil futures, which offer price exposure to the commodity without having to physically hold it.
The Invesco DB Oil Fund (DBO) and the K-1 Free Crude Oil Strategy ETF (OILK) are examples of funds that offer exposure to oil futures.
Second, McMillan said that he also effectively takes long positions on oil by betting on companies in the sector, like service providers or producers.
“We like to express views not just through commodities but also the commodity-related equities. I think, frankly, it’s a very underserved exposure for investors,” he said. “Most managed futures funds, by definition, don’t touch anything but futures, and then even a lot of the commodity-only options out there are kind of long-only commodity futures.”
For exposure to oil-related stocks, McMillan said that IDX has held the VanEck Oil Services ETF (OIH), the Global X Mlp Etf (MLP), and the Energy Select Sector SPDR Fund (XLE) this year.
