Oil is breaking out. A combination of supply, demand and geopolitical factors has pushed prices for global crude benchmarks to levels last seen more than four years ago.
West Texas Intermediate crude oil—better known as WTI, and the U.S. benchmark—reached as high as $67.45 on Wednesday, while European benchmark Brent crude oil touched $73.09, the loftiest prices since late 2014.
WTI and Brent are up 10.5% and 7.5%, respectively, so far this year. The latest push higher comes as geopolitical tensions heat up.
On Wednesday, President Trump threatened to strike government forces in Syria in retaliation for a chemical attack in that country. That same day, Saudi Arabia said it intercepted missiles headed for its capital and oil-producing regions that were launched by Iran-backed rebels in Yemen.
Supply Deficit Forming
The flare-up in geopolitical worries is taking place just as the oil market is on the verge of moving decisively into deficit, according to the International Energy Agency (IEA).
The IEA forecasts supply growth will fail to keep up with demand growth this year, as cuts to OPEC production offset surging output in the United States.
This cocktail of bullish factors has many analysts forecasting a continued run in oil prices.
WTI at $75 and Brent at $80 are on the table, according to Helima Croft, global head of commodity strategy at RBC. Going further, if the situation in the Middle East escalates into an all-out war, Again Capital’s John Kilduff says prices could reach more than $100.
Tried & True
For investors interested in playing the run-up in crude prices, the natural question is, what’s the best way to do so?
There are the usual suspects. The $2.0 billion United States Oil Fund (USO) provides direct exposure to front-month WTI futures contracts. That’s a strategy that’s done well this year, returning 12.1% year-to-date, even more than spot WTI prices themselves. thanks to a futures curve in backwardation.
Then there’s the $18.7 billion Energy Select Sector SPDR Fund (XLE), the granddaddy of ETFs targeting shares of energy companies. Even though oil prices have surged, XLE has had a rough start to the year, and was at one point one of the worst-performing sector ETFs in the market.
But this week, investors began buying into the energy story, sending XLE to its highest level in about 2 ½ months. The fund is currently down about 1.9% year-to-date.