Oil ETFs Rise Amid Red Sea and Iran Attacks

Oil ETFs have been rising in the first trading days of 2024, as the market reacts to escalating Middle East tensions. 

Against a backdrop of Red Sea attacks and the Libyan oil disruption, oil ETFs like the United States Oil Fund LP (USO) were up nearly 3% in the first three days of trading this year, as stocks and bonds were both negative. While escalating tensions can keep upward pressure on crude oil in the short term, where oil goes in the coming weeks and months remains unclear.

Red Sea and Iran Attacks Stoke Oil Supply Fears

On Dec. 31, U.S. helicopters sank three Iran-backed Houthi militant boats, which have been attacking high-value cargo ships in the Red Sea, a vital artery to the crucial Suez Canal trade route. The sinking of the militant boats followed weeks of smaller attacks on shipping vessels, culminating in a missile attack and attempted hijacking of a Maersk ship. 

On Tuesday, Iran deployed a warship to the Red Sea, raising fears of crude oil supply disruptions in the region.  

On Wednesday, Middle East tensions rose further as two explosions killed nearly 100 people and wounded many others in Iran as they attended a ceremony commemorating Qassem Soleimani, a leading commander of Iran’s Revolutionary Guards who was killed by a U.S. drone in 2020.  

The Islamic State claimed responsibility for the attack in a Thursday post on the social media platform Telegram Iran previously vowed revenge. A disruption at a top Libyan oil field also added to supply fears. 

Will Oil ETFs Rise Further on Supply Concerns?

The Organization of Petroleum Exporting Countries (OPEC) released a statement Wednesday saying it was committed to “unity, full cohesion and market stability.” 

In the coming days, investors will likely assess OPEC’s reassuring message as well as whether strong non-OPEC supply will support the market as it did in 2023. Higher output from outside OPEC has thus far countered the producer group’s efforts to tighten the market.