Over the last few weeks I’ve been thinking about what could be the best hedge nowadays. It seems to me that a short/put in oil or oil related companies could be it. Why?
Because the current oil bull market has been based on expanded demand and geo-political risks, not on supply constrains. Geopolitical risks are hard to gauge, but since they’ve been high for a while, mean reversion, at least, should be on your side over the medium term.
As for the supply/demand balance, the idea is to hedge against lower global growth, a scenario where oil demand would certainly abate. On the other side, progress in new sources in Russia and Brazil will eventually hit the market, as well as an increase in Iraq production as soon the situation become more stable there.
And last but not least, alternative sources are finally coming through, motivated both by higher oil prices and environmental concerns.
Bottom line is that I’d bet a great amount that oil prices will be substantially lower over the next 5 years. Maybe “short oil” could be more than a hedge. It could be a theme. Next step would be to search for the best vehicle.
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