After a Middle East crisis even, crude oil prices and related ETFs typically outperform other more defensive assets in the following months.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures,increased 2.1% over the past week and advanced 12.1% over the past month. Meanwhile, WTI crude oil futures were hovering around $62.8 per barrel.
Crude oil prices popped off after a U.S. airstrike in Baghdad killed Major General Qasem Soleimani, Iran’s top military commander, CNBC reports.
According Kensho data, oil led the charge following prior Middle East crises. Looking back to market reactions across 20 Middle East crisis events over the past three decades, WTI crude oil showed an average return of 5.9% after being bought one day before a crisis and sold one month after. WTI crude returned an average 9.1% after being bought one day prior to a crisis and sold three months after. The data also showed a positive change in WTI crude for 80% of the time in the month following major events.
“We should not think of it as a short-term situation,” RBC head of commodity research Helima Croft told CNBC. “Their response I think is going to be something we’ll be dealing with over the course of 2020 … I don’t believe this is over.”
Eurasia Group recently raised its 2020 high end base case oil target to $75 per barrel, citing the “rising risk to oil infrastructure in the region.” If conflict breaks out, which the firm’s Middle East and North Africa head Ayham Kamel put at 30% chance, prices could surge to $95. Iran has already promised retaliatory action to the U.S. airstrike and has shown it is capable of targeting the global oil supply chain.
Citi global head of commodity research Ed Morse has warned that Iran could target production in Iraq, the second largest oil producer among the Organization of Petroleum Exporting Countries.
“Iraq’s southern oil output and exports via Basra hang in the balance. If that gets hit, oil prices will spike higher,” Again Capital’s John Kilduff told CNBC.
Leveraged Oil ETF Plays
ETF traders looking for leveraged oil plays can consider the following:
- United States 3x Oil (NYSEArca: USOU): USOU seeks the daily changes in percentage terms of its shares’ per share NAV to reflect three times the daily change in percentage terms of the price of a specified short-term futures contract on light, sweet crude oil. USCF will endeavor to have the notional value of the fund’s aggregate exposure to the Benchmark Oil Futures Contract at the close of each trading day approximately equal to 300% of the fund’s NAV. The Benchmark Oil Futures Contract is the futures contract on light, sweet crude oil as traded on the NYMEX, traded under the trading symbol “CL.”
- UBS ETRACS ProShares Dly 3x Lng Crud ETN (NYSEArca: WTIU): With WTIU, the 3X long securities provide a daily long leveraged exposure to the performance of the Bloomberg WTI Crude Oil Subindex ERSM. The index is designed to measure the return from a rolling long position in WTI crude oil futures contracts that trade on major U.S. exchanges.
- VelocityShares 3x Lng Crude Oil ETN New (NYSEArca: UWT): UWT seeks to replicate three times of the S&P GSCI® Crude Oil Index ER. The index tracks a hypothetical position in the nearest-to-expiration NYMEX light sweet crude oil futures contract, which is rolled each month into the futures contract expiring in the next month. The value of the index fluctuates with changes in the price of the relevant NYMEX light sweet crude oil futures contracts.
- ProShares UltraPro 3x Crude Oil ETF (NYSEArca: OILU): OILU seeks to return a multiple (3x) of the performance of the Bloomberg WTI Crude Oil Subindex for a single day. The fund seeks to meet its investment objective by investing, under normal market conditions, in futures contracts for WTI sweet, light crude oil listed on the NYMEX, ICE Futures U.S. or other U.S. exchanges and listed options on such contracts.
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