Oil exchange traded funds jumped Thursday and are now testing their short-term trend lines, after Saudi Arabia and its Gulf allies bombarded Yemen, triggering speculation that the conflict would interrupt oil supplies in the region.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate oil, rose 4.9% Thursday and the United States Brent Oil Fund (NYSEArca: BNO) increased 3.6%. Both USO and BNO are now trading above their 50-day simple moving average.
Meanwhile, WTI crude oil futures were up 3.5%, trading back to $50.9 per barrel, while Brent crude oil futures gained 4.4% to $59 per barrel.
The U.S. energy sector was also slightly turning around on the surge in oil prices and positive turn in the equities market mid-Thursday, with the Energy Select Sector SPDR (NYSEArca: XLE) up 0.2% and SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) 1.2% higher.
Fueling the spike in energy Thursday, Saudi Arabia spearheaded a strike against Houthi rebels, who drove the president out of Yemen’s capital Sanaa, reports Barani Krishnan for Reuters.
While the strike has not affected oil facilities of producers in the region and Yemen’s small oil output has been unstable for months, energy traders are concerned that the conflict could disrupt Middle East oil shipments.
Specifically, Arab producers ship their crude past the Yemen coastline through the Gulf of Aden toward the Suez Canal, a major passageway to European markets. The U.S. Energy Information Administration has designated the less than 25 mile wide waters between Yemen and Djibouti as a “chokepoint” for global oil supply that funneled 3.8 million barrels per day in 2013.
However, some argue that the spike in prices Thursday was just a knee-jerk reaction to the sudden uncertainty, and the markets could return to the supply glut pressures. [Potential Storage Crisis Could Put Oil ETF In A Tailspin]
“A lot of times you get the market reacting dramatically right off the bat to events like these, before people begin putting things in perspective after a greater study of the risks involved,” Phil Flynn, analyst at the Price Futures Group, said in the article.
Consequently, if the Yemen-induced volatility is short lived, ETF investors may be back to inverse options as a way to hedge or capitalize on the fall in oil. For instance, the United States Short Oil (NYSEArca: DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, DB Crude Oil Short ETN (NYSEArca: SZO) tracks the simple inverse of oil, ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) tries to reflect the two times inverse or -200% daily performance of WTI crude oil, DB Crude Oil Double Short ETN (NYSEArca: DTO) also follows a -200% performance of oil and VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil. [Investors Capitalize on Oil Swings with Leveraged ETFs]
United States Oil Fund
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Max Chen contributed to this article.