A ruinous trade war is escalating, roiling not just the broader stock market but also the energy patch. At the same time, tensions among nations are rising, especially in the strategically vital Persian Gulf. The U.S. has deployed an aircraft carrier, combat jets and bombers to the region, to counter a supposed threat from Iran to Saudi oil.

At any moment, headline risk could blow up into an actual shooting war.

Now’s an opportune time to interview our seasoned expert on energy: Robert Rapier, chief investment strategist of Utility Forecaster and a regular contributor to our flagship publication, Personal Finance. I work as the managing editor on both publications, which gives me a first-hand look at the superb quality of Robert’s editorial contributions.

If you want to lose money, listen to the fatuous pundits on cable television. If you want to make money and also protect your portfolio, listen to Robert [pictured].

The energy market for several months has moved in tandem with the overall stock market. Why are the two markets in sync and what does it mean for investors?

The economy has been strong, which is why most sectors have been up. But during the fourth quarter of last year, President Trump granted waivers to allow countries to continue importing oil from Iran.

Saudi Arabia had ramped up production in anticipation for Iranian oil to come off the market, and when Trump granted the waivers there was too much oil on the market. Oil prices collapsed, and energy companies, which had been doing well last year up to that point, saw their share prices hard hit.

What we have seen this year is a recovery in oil prices, and subsequently in energy companies. Thus, as you say the energy markets have been back in sync with the rest of the market due to the oil price recovery. But investors do need to be wary if oil prices continue to rise, as some sectors are especially sensitive to high oil prices.

Do you envision a point at which the broader indices and the energy patch decouple? If so, what would be the catalyst?

Yes, a sharp move in oil prices, up or down, could cause the markets to decouple. If the current conflict with Iran worsens, there is the potential for a sharp run-up in oil prices. That would be a problem for the overall economy, but a boon to the energy sector which would benefit from higher oil prices. The one exception is the refining sector, which usually sees eroding margins when oil prices spike.

Occidental Petroleum (NYSE: OXY) recently made a successful bid to buy Anadarko Petroleum (NYSE: APC), beating out Chevron (NYSE: CVX). We know that OXY and CVX covet APC’s Permian Basin assets. But what does this move mean for commodities as a whole? Will we start to see more M&A activity in the booming commodities sector?

Even after producing oil for 100 years, the Permian Basin still has a lot of life left. The majors are now moving in with greater urgency. ExxonMobil (NYSE: XOM) has already made some deals, and the pursuit of Anadarko was Chevron’s attempt to secure its position as the dominant producer in the region.

The breakeven cost of oil production in the Permian is lower than almost anywhere else in the country, so it makes sense to focus efforts there as long as you don’t have to overpay for acreage. Chevron made what it felt was an attractive offer, but the potential synergies would have disappeared if they had been forced to match Occidental’s offer.

I don’t think the oil companies expect any sort of long-term return to oil prices that are $40/bbl or lower, and they can make a lot of money in the Permian if that’s the case. There are plenty of companies operating in the Permian with reserves on the books at well below that price and that’s where companies will be looking.

The trade fight is escalating into punch/counterpunch, Iran and the U.S. are rattling sabers, North Korea has resumed missile launches, and Brexit is a mess. How does this geopolitical turmoil affect oil and gas prices and global stock markets? How can investors protect their portfolios?

There is a lot more risk in the markets right now than I think investors appreciate. Wall Street has gotten complacent. It’s been a long time since we have had a 20%+ down year in the S&P 500, but historically the market has averaged one of those nearly every decade for the past 90 years.

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The last big market crash occurred in 2008, when the S&P 500 declined by nearly 40%. It took a few years to recover from that one, and if investors are near retirement age or can’t otherwise afford the time to recover from a big loss, they should really get defensive and shift more into fixed income investments or in defensive sectors like utilities.

If an investor has a longer time horizon, I wouldn’t worry too much about the current turmoil. Over the longer term, history says that you are better off just to ignore all of that and remain confident that it will shake out in the long run.

Generally speaking, what are your favorite types of energy plays now? For starters, investors would be shrewd to pinpoint future acquisition targets in the Permian Basin, correct?

I have favored the midstream sector for a while, but it has finally started to become more fully valued. At the moment, I don’t believe any of the energy sectors are severely undervalued, but there are a lot of oil companies that haven’t had a proportionate rise in response to the big move up this year in oil prices.

Consequently, while no sector is deeply undervalued, there is still value in individual companies within sectors.

The Permian Basin will continue to be a hot spot for M&A activity. Other major producers in the Permian include ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), Pioneer Natural Resources (NYSE: PXD), Noble Energy (NYSE: NBL), Devon Energy (NYSE: DVN), and Diamondback Energy (NSDQ: FANG). The supermajors could target these companies, or they could look to target smaller Permian producers such as WPX Energy (NYSE: WPX), Parsley Energy (NYSE: PE), or Cimarex Energy (NYSE: XEC).

Any of these companies could be takeover targets, but the double-digit gains of both Pioneer Natural Resources and Parley Energy following Chevron’s announced intent to acquire Anadarko imply that investors believe they could be next on the acquisition list.

Questions for Robert Rapier? Drop us a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.