Oil exchange traded funds are rallying with crude futures spiking above $110 a barrel Thursday on reports of a pipeline explosion in Saudi Arabia, which were later denied by Saudi officials.
Better economic growth and continued tensions with Iran “have led to a significant increase in both oil and gasoline prices in recent weeks,” says David Kelly, chief market strategist at JP Morgan Funds.
“This issue now represents the greatest near-term threat both to the global economy and global financial markets,” he said.
The $1.6 billion U.S. Oil Fund (NYSEArca: USO) is up more than 10% over the past month. The ETF tracks futures contracts, so it can lag the spot price when the futures market is said to be in “contango.” [Five Things to Know About Commodity ETFs]
Rising oil prices due to increased geopolitical tensions in the Middle East are a key risk for investors, says Mark Luschini, chief investment strategist at Janney Montgomery Scott.
“While we believed the trend of higher oil prices was likely to come from the almost inelastic demand for energy by the rapidly growing emerging markets, a renewed threat of an upward spike on the back of supply disruptions is worrisome,” he wrote in a recent note.
Gas prices are shooting higher, leading to predictions consumers may be looking at $5 a gallon later this year. [Gasoline ETFs to $5 a Gallon?]
U.S. Gasoline Fund (NYSEArca: UGA) is up nearly 20% year to date. [Gasoline ETF Surge Reflects Pain at the Pump]
“The ‘tax’ higher gas prices have on consumption is measurable. At the moment, the offsets are a warmer-than-usual winter lessening the burden of higher heating bills, and an improving labor market,” Luschini wrote.
“So while filling the tank may cost a bit more, the aggregate economic impact has not yet been that impactful on a comparative basis,” the strategist added. “That said, at some point, staring at $4 per gallon of regular unleaded, a sight already found by drivers in some states, could have an unpleasant psychological, if not economic, impact.”
U.S. Oil Fund
