Is an Oil ETF Rally on Middle East Tensions Sustainable?

Sweta Jaiswal, FRM

President Trump recently confirmed the destruction of an Iranian drone in the Strait of Hormuz by the U.S. Navy. This drove oil prices by 2%. The U.S. Navy claims that it acted in self-defense as the aircraft came alarmingly close to the vessel and ignored multiple warnings to stand down.

The incident followed U.S. Central Command chief General Kenneth McKenzie’s comments that the United States will take the required measures against the latest attacks on oil tankers in the Gulf. In June 2019, Iran had shot one U.S. Navy drone down. However, Tehran continues to deny any attack. In this regard, Iran’s Deputy Foreign Minister Abbas Araqchi had tweeted on Jul 19 that Tehran has “not lost any drone in the Strait of Hormuz nor anywhere else" (read: Iran Downs U.S. Drone: Sector ETFs & Stocks to Gain).

Other Factors Driving Oil

Here are certain developments that have been fueling the rally in oil prices:

Possible Rate Cuts by Fed

New York Fed President John Williams’ latest speech, hinting at a more aggressive approach to rate cuts, contributed to the rally in oil prices. However, the Fed had to later clarify that the market misinterpreted the speech as a rate cut signal. It is worth noting here that Federal Reserve’s Chairman Jerome Powell recently indicated Fed’s intention to cut interest rates, should the need be. Investors forecast a quarter-point slash in interest rates after a stronger jobs report curbed projections for a rate cut by 50 basis points.

OPEC’s Initiative to Cut Oil Output

OPEC has of late decided to extend the oil production cut through 2020 in a bid to boost oil prices. Russia is once again cooperating with OPEC on the same.

Tensions Brew Over Iran’s Nuclear Program

Iran recently increased its enrichment levels for uranium from the agreed 3.7% under the Joint Comprehensive Plan of Action (JCPOA) act to 5%, while still keeping it below the 20% threshold. Tehran tensed up the situation by commenting that it will keep breaching agreements under the deal every 60 days, lest the European signatories to the JCPOA deal  protect it from the sanctions imposed by President Trump.

Is the Rally Sustainable?

The prospects of oil look a little bearish. U.S. government recently reported a smaller-than-expected drop in oil stockpiles and expanding fuel inventories. Moreover, International Energy Agency (IEA) recently lowered its 2019 oil demand forecast due to a slowdown in global economy amid Sino-US trade tensions. The IEA revised the 2019 global oil demand growth estimate to 1.1 million barrels per day (bpd) from 1.2 million bpd projected in June 2019 and 1.5 million bpd stated last year.

ETFs to Shine

This has compelled many investors to take a closer look of the oil commodity space and related ETFs (see all Energy ETFs here).

United States Brent Oil Fund BNO

The fund tracks the daily price movements of Brent crude oil (read: ETFs to Gain From the Oil Rally on US Crude Inventory Data).

AUM: $90.4 million

Expense Ratio: 0.90%

YTD Return: 20.6%

United States Oil Fund USO

The United States Oil Fund seeks to track the daily price movement of WTI light, sweet crude oil (read: 4 Reasons That Led Dow Jones to 27,000: ETFs in Focus).

AUM: $1.33 billion

Expense Ratio: 0.73%

YTD Return: 20.2%

Invesco DB Oil Fund DBO

The fund tracks changes, whether positive or negative, in the level of the DBIQ Optimum Yield Crude Oil Index Excess Return plus the interest income from the holdings of primarily US Treasury securities and money market income less expenses (read: ETFs to Gain From the Oil Rally on US Crude Inventory Data).

AUM: $278.8 million

Expense Ratio: 0.78%

YTD Return: 15.5%

US Commodity Funds United States 12 Month Oil USL

The fund replicates with possible accuracy the movements of West Texas Intermediate light, sweet crude oil.

AUM: $53.4 million

Expense Ratio: 0.82%

YTD Return: 16.7%

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US Commodity Funds United States 12 Month Oil (USL): ETF Research Reports
 
US Commodity Funds United States Oil Fund (USO): ETF Research Reports
 
United States Brent Oil Fund LP (BNO): ETF Research Reports
 
Invesco DB Oil Fund (DBO): ETF Research Reports
 
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