Oil ETFs Sink as Geopolitical Premium Evaporates

Oil ETFs are getting slammed this week as some of the “geopolitical premium” in prices evaporates.

The United States Oil Fund (USO) tumbled more than 5% on Monday and another 1% on Tuesday after retaliatory strikes by Israel on Iran weren’t as damaging as feared. The price of WTI crude oil was last trading below $70/barrel. 

Israel said that it attacked military targets in Iran, a relief to many who had believed that Israel could target its archnemesis’ oil facilities.

The price of WTI touched nearly $80/barrel in early October after Iran directed 200 ballistic missiles at Israel.

Israel promised to respond forcefully to that attack, setting off the rally in oil. Iran pumps around 3.4 million barrels of crude oil per day.

Oil ETFs Take a Spill

Following Iran’s attack, the International Energy Agency (IEA) warned that an attack on “[Iran’s] main Kharg Island export terminal that ships 1.6 mb/d of crude, primarily to China, is a major concern as is the potential spillover to the strategic Strait of Hormuz waterway.”

However, following Israel’s relatively muted response, disruptions to Iran’s oil supplies seem less likely, hence the drop in oil prices.

Still, the prospect of another round of tit-for-tat strikes between Israel and Iran certainly remains a possibility. 

Iran hasn’t ruled out a response to Israel’s attack. And if the two countries continue exchanging blows, at some point, Iran’s oil production could be impacted.

On the other hand, barring an actual disruption to Iranian supplies, the oil market looks weak.

In its latest oil market report, the IEA wrote that “global oil demand is expected to grow by just under 900 kb/d in 2024 and by around 1 mb/d in 2025, significantly lower than the 2 mb/d seen in 2023.”

The agency noted that “Chinese oil demand is particularly weak, with consumption dropping by 500 kb/d y-o-y in August – its fourth consecutive month of declines. At the same time, non-OPEC+ oil supply, led by the Americas, continues to make robust gains of around 1.5 mb/d this year and next.”

The IEA added that productions gains from the U.S., Brazil, Guyana, and Canada will collectively total 1 million barrels per day in both 2024 and 2025, which “will more than cover expected demand growth.”