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Unless you've been hiding under a rock for the past few weeks, you've probably noticed that gasoline prices are on the rise and oil prices are hitting highs not seen since October 2008. Political turmoil in Egypt and now Libya is partially to blame for the rising uncertainty traders are factoring into the market. This uncertainty has translated into two marketwide sell-offs in a row.
The great thing about the stock market though is you can enter a trade from almost any angle. Just because oil is moving higher doesn't mean you can't profit from this market with long and short bets. Below, I've outlined various ways you could potentially make money despite a very turbulent political climate. Remember, these are merely suggestions but should serve as the basis for further research.
Play the crude gap arbitrage-style
For those of you not familiar with arbitrage, it's the act of buying and simultaneously selling an investment across different markets in order to take advantage of a suspected price imbalance. Still confused? Let's make this trading opportunity easier to understand.
There are two widely followed crude indexes: West Texas Intermediate and Brent crude. Brent crude is typically found in the North Sea and is often refined in northwestern Europe. WTI is a lighter, sweeter form of crude refined in the Midwest and Gulf states of the United States. Because of the ease in refining WTI into gasoline compared to Brent, up until recently, WTI usually trades at a premium. However, since political turmoil has shaken the Middle East, things have made a complete 180, and Brent is trading vastly higher, closing at a near-record gap of $13 over WTI. An oversupply of crude in the Midwest is partly to blame for the price disparity. The other part of the puzzle is there's a greater risk of supply disruption to Western Europe than the U.S. if Libyan production ceases altogether. Now to the big question: How could you play this gap?
It just so happens that there are exchange-traded funds that invest in the short-term future contracts of WTI and Brent -- United States Oil Fund (NYSE: USO ) and United States Brent Oil Fund (NYSE: BNO ) . If you consider the long-term history of these two types of crude, they usually trade in tandem, so I anticipate this price gap to be temporary. Purchasing the U.S. Oil Fund while simultaneous betting against the U.S. Brent Oil Fund could give you a chance to profit from both angles if the gap between these indexes shrinks or disappears altogether.
Think outside the box
You don't have to invest directly in oil in order to take advantage of rising oil prices. There are plenty of alternative energy options that could be worth a look if oil continues to flirt with $100.
As oil ascends to the heavens, consumers and governments are going to be actively searching for new forms of cheap, yet safe, energy generation, and nuclear could be the answer. Little has been made of it, but nuclear energy still accounts for roughly 20% of all energy generated in the United States. Rather than singling out individual nuclear operators, it could be more beneficial to focus on a company such as Fluor (NYSE: FLR ) that designs and builds nuclear facilities. Fluor should have no shortage of business this year if energy prices continue higher, and that should be reflected in its bottom line.
The disparity between natural gas and oil has also widened to the point where it makes sense to assume local and state governments will explore the use of natural gas for energy generation. Possibly no company offers a better portfolio of natural gas interests than Chesapeake Energy (NYSE: CHK ) , which reported better-than-expected earnings results yesterday. If energy prices continue to trend higher, it seems logical to assume that natural gas will follow suit, and rising natural gas prices should boost Chesapeake's margins.
You might think the ethanol debate is all but dead, but considering it's currently $0.36 cheaper than gasoline per gallon, it remains an inexpensive and viable alternative. Archer-Daniels-Midland (NYSE: ADM ) remains a personal favorite ethanol play because of its high level of diversification and its 1.7% dividend yield.
Buy high, sell higher
It often seems that when one commodity is rallying, most other commodities follow suit. Rising commodity prices can be troublesome for stocks because it often means rising material costs and potentially lowered discretionary spending. When the market heads lower in response to rising commodity prices, one area to consider is gold.
I am not a long-term gold bull, but given that global uncertainty is rearing its ugly head, the flight to safety into gold could be strong enough to propel it to new highs. There are a couple of ways you could play the rising gold trade.
First you could pick up the SPDR Gold Trust (NYSE: GLD ) , which will closely mirror gold's price movements since it directly holds and purchases gold bullion. If you have a greater appetite for risk, you could seek out an individual miner that has a good chance to move higher on rising gold prices. Recently I highlighted Aurizon Mines (AMEX: AZK ) as a gold miner worth a closer look, and I think they could be a perfect hedge in this environment.
Do you have a strategy to survive rising oil prices? Share your thoughts below and consider following my predictions with My Watchlist.