Syria: What's Next For Investors?

 |  Includes: LSTMF, UCO, USO
by: MLP Trader

While the Syrian crises was first heating up, I wrote two articles (here and here) where I suggested that the U.S. would create pressure on Syria through Russia to orchestrate a deal where Syria relinquishes its chemical weapons.

"There are indications that Russia has used its leverage with Syria before to isolate the chemical weapons in certain areas. I suspect it will do this again....An agreement to give up the chemical weapons to Russia in exchange for another lease on life is a distinct possibility at this point."

With recent news reports, it looks like that's exactly what will happen. Russia has made a proposal to Syria for it to abandon all of its chemical weapons and Syria has declared that it is open to the proposal. In his address to the nation, the President delayed Congress' vote on the punitive strike so that his administration can pursue the proposal.

I think the chances of this deal working out are very high at this point. It's a win-win for everyone with power. Putin gets to look like a hero, President Obama gets to avoid an unpopular political mess and salvage some of his credibility over "red-line" statements, and Assad gets to stay in power. It is surprising that oil hasn't come down much faster given the high likelihood of this sort of peaceful deal occurring.

My longer term outlook remains the same. Reading the newspapers from around the region, it is clear that confidence in the United States acting forcefully and decisively in a regional crisis has evaporated. The influence of both Russia and Iran in the region has been greatly enhanced at the expense of the U.S.

The enormous dangers from a nuclear Iran or a Saudi succession crisis are therefore much greater than they were a few weeks ago. That means that within a few years, we are likely to see a real crises that will truly threaten the flow of global oil. A Russian brokered deal for Syria to abandon its chemical weapons has increased the chances of that, not diminished them.

The Investment Perspective

For my part, my investing strategy remains as I outlined in the earlier articles: I will start selling back my oil futures puts when WTI oil reaches the 90s. Investors who have puts on the oil ETF (NYSEARCA:USO) or leveraged ETF (NYSEARCA:UCO) might consider a similar strategy.

If a deal or is reached (or a punitive strike has been completed) and oil drops substantially, it will be a good time to start positioning for the next crisis. There are a variety of Canadian E&P companies trading at substantial discounts to their risked NAVs. Lightstream (OTC:LSTMF) is a particular standout, trading at half its NAV and yielding over 13%.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTC:LSTMF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long oil futures Puts