Should You Invest in Oil ETFs on Rising Middle East Tensions?

Tensions in the Middle East escalated on Wednesday following an Iranian missile attack on Israel, sparking demand for safe-haven assets as investors grew anxious about the potential expansion of the conflict.

On Wednesday, Iran claimed its missile attack on Israel, the largest military assault on the Jewish state, was over unless further provoked. Israel and the U.S. promised retaliation as fears of a broader war intensified. Israel reported that over 180 ballistic missiles had been fired by Iran, in retaliation for Israeli military actions in Lebanon against Hezbollah.

Inside the Oil Rally

The geopolitical tensions have raised oil prices, with analysts suggesting that further market moves will depend on Israel's response and potential attack on Iran's oil infrastructure. Oil prices jumped more than $1 on Oct. 2, 2024, following the news of the attack.

Westpac strategist Imre Speizer noted that while the Middle East conflict is erratic, markets could refocus on economic concerns if the situation calms down, per Reuters, as quoted on Yahoo Finance.

Should You Play the Pop in Oil Prices?

The recent rise in oil prices is modest and reflects the market’s belief that Mideast oil will continue to flow despite the escalating war. There’s a reason for this. Per analysts, Israel’s key ally, the United States, is pressuring Israel not to target Iran's oil facilities.

Given Israel’s need for U.S. assistance in the ongoing conflict, Israel is likely to keep Iran's oil facilities off the target list, at least for now, in exchange for support. Iran supplies about 1.5% of the world’s oil, which is not a significant figure. However, if Iranian oil were removed from the market, prices would surge. And the surge would be fear-induced.

OPEC Delays Output Hike

Investors should note that the OPEC+ alliance is once again intensifying efforts to ensure member compliance with its agreed oil production cuts, continuing a three-pronged strategy that includes formal and voluntary output reductions.

Eight OPEC+ members, including Saudi Arabia, were initially set to reintroduce 2.2 million barrels per day (bpd) of voluntary cuts to the market in October. However, this rollback has been delayed until December.

Bottom Line

Oil prices have remained relatively low for most of the year. On Sept. 26, 2024, prices declined sharply following a Financial Times report suggesting that Saudi Arabia might endure lower oil prices and abandon its unofficial $100 per barrel price target to increase production after December.

Although OPEC+'s delay in raising output and the escalation in the Middle East tension may boost oil prices in the near term, the medium- and long-term outlook remains bleak due to demand concerns. Any output increase could mar the rising price momentum. However, the initiation of global monetary policy easing and fiscal stimulus in some economies should support oil prices over the medium term.

Oil ETFs in Focus

Invesco DB Oil Fund DBO, ProShares K-1 Free Crude Oil Strategy ETF OILK and United States 12 Month Oil Fund LP USL are some of the oil ETFs that should be closely tracked in the current scenario.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research