It is impossible to know how the tensions between Israel and Iran will ultimately be resolved. However, it is likely oil prices will be well supported if the status quo persists and could potentially rise dramatically if things escalate.
For this reason, investors should consider an allocation to investments which would perform well and could help to offset other investment losses if the price of oil rises abruptly.
Even in the absence of a major conflict in the Gulf, oil prices are unlikely to fall far. We estimate that the current supply of oil coming out of the ground globally is barely sufficient to meet demand.
Over time, the quoted oil and gas sector has shown a high degree of correlation with the underlying commodities in which these companies deal.
Oil and gas is also one of the cheapest sectors in the developed world relative to the stated value of its assets. Even in the absence of all-out war in the Middle East, current valuations and the well supported oil price are among the reasons to consider an allocation to the sector.
We see some merit in clients tailoring their exposure to the sector, however, to maximise the efficacy of the hedge.
For example, overcapacity in both natural gas and refining is hitting profitability in companies exposed to those areas.
We believe the most attractive companies, both as a hedge and as a plain equity investment, are those predominantly engaged in exploration and production rather than any downstream activity.
We see similar attraction in businesses that provide services and equipment to the sector. Rising oil prices are likely to make previously uneconomic projects viable, requiring more sophisticated equipment and greater field expertise.
Mark McCue is a director at Barclays Wealth Aberdeen