Oil futures and ETFs fell sharply on Thursday, while inverse crude ETFs soared amid rumors of there being a chance to mitigate tensions in the Middle East.
Crude traders have been observing how issues in the Middle East are playing out. That helps to assess global risks to the oil market.
After slumping in the prior sessions, U.S. benchmark West Texas Intermediate crude oil futures fell nearly $2 to $73.82 per barrel. That’s roughly 2.3%. At the same time, as traders weighed reports of a possible ceasefire in the Middle East. The move dragged crude ETFs lower as well.
Rumors of any potential ceasefire led to “questions that if it is true, will we see a reduction of tensions between Iran and the U.S.,” Phil Flynn, senior market analyst at The Price Futures Group, told MarketWatch.
A Possible Suspension of Hostilities
These musings may have stemmed from The Jerusalem Post report that the Qatari foreign ministry claimed that Hamas had offered preliminary approval for a suspension of hostilities and a possible hostage deal in Gaza.
Manish Raj, managing director at Velandera Energy Partners, said a ceasefire in the ongoing war since last October would “bring joy to the troubled shipping lines” in the region or curb problems in the Red Sea that have been blamed on Iran-backed Houthi rebels.
Yet “there is the argument on the other side that the U.S. has made specific plans to take firm action,” he said. “Insofar as there is no military risk-premium built into oil prices, the runway to oil dropping is limited.”
When the dust settles, oil will likely “go back to trading on fundamentals rather than on Middle East rumors,” said Raj.
Oil futures have struggled since late 2023. They fell on Wednesday following government data that revealed a surprise build in U.S. crude and gasoline inventories last week.
However, some experts believe crude oil and, therefore, potentially crude ETFs could see more gains after both WTI and Brent finished up in January.
“Total output does remain 300K b/d from the record though. If we don’t see the rest of that production restored in the next few weeks, that will mean a 2.1 million barrel weekly deficit relative to the early year levels,” wrote analysts at Sevens Report Research, in a note. “The longer that persists, the more bullish it becomes.”
A Potential Crude Oil Rally
There was also some hope that oil markets might rally if the Federal Reserve cut interest rates. However, the optimism was short-lived.
“Any kicker that investors were seeking from Jerome Powell’s post-FOMC, unchanged rate decision, was sadly lacking,” wrote John Evans with oil broker PVM in a note Thursday. “Still, Powell’s language implies that the market will likely get interest rate relief at some point this year.”
Investors looking to use ETFs to purchase crude oil can look into the United States Oil Fund (USO), which is over 2% lower today amid the fall in oil futures, or the ProShares Ultra Bloomberg Crude Oil (UCO).
Meanwhile, short ETFs like the ProShares UltraShort Bloomberg Crude Oil (SCO), which is up more than 4% Thursday, could benefit from continuing inflation and lower oil demand.
SCO is for savvy traders and investors and offers 2x daily short leverage to the broad-based Dow Jones-UBS Crude Oil Sub-Index, making it a powerful tool for individuals with a bearish short-term outlook for crude oil. Investors should note that SCO’s leverage resets daily, resulting in compounding returns when held for multiple periods. SCO can be a powerful tool for sophisticated investors but should be avoided by those with a low-risk tolerance or a buy-and-hold strategy.
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