Oil Price Fluctuations Amid Iran Conflict
The ongoing Iran conflict has led to significant shifts in oil prices. At the end of February, West Texas Intermediate (WTI) crude oil futures were priced around $65 per barrel. However, by March 9, prices surged to nearly $120 before stabilizing at approximately $85, which is still the highest level since late 2023.
But, it appears that this volatility might not be finished. President Donald Trump has stated that he anticipates the situation will be resolved “soon,” yet activity in the region continues unabated. There remains a genuine possibility that oil could reach $100 again, especially if access to the Strait of Hormuz is limited for oil cargo ships and freighters.
For those considering oil investments, there are three main exchange-traded funds (ETFs) worth looking into. Each option provides varied exposure to the oil market, and the choice will depend largely on one’s risk tolerance regarding market volatility.
The American Oil Fund (NYSEMKT: USO) is the most frequently utilized ETF for oil exposure. This fund predominantly invests in the nearest expiring WTI crude oil futures contract and shifts to the subsequent contract as needed. Clearly, contracts nearing expiration can be volatile since they’re more influenced by immediate events. During the downturn caused by the pandemic, this fund adjusted its strategy to mitigate risks, enabling investments in contracts for a three-month duration. Now, it has reverted to focusing solely on the previous month’s contract, allowing investors to gauge current oil prices effectively.
The US 12 Month Oil Fund (NYSEMKT: USL), in contrast, is crafted for a more stable investment approach. It distributes investments equally across the next 12 months of contract maturities, which historically has resulted in reduced volatility compared to the American Oil Fund. This strategy paid off in 2020 during the drastic fall in energy prices; while the U.S. Oil Fund plummeted over 80%, the US 12 Month Oil Fund only decreased by about 60%.
If someone is looking for even more significant leveraged performance, the ProShares Ultra Bloomberg Crude Oil Fund (NYSEMKT: UCO) could be appealing. It aims to provide 2x daily exposure to the Bloomberg Commodities Balanced WTI Crude Oil Index. However, caution is advised: this fund is intended for very short-term positioning, typically just a few days, and may not be appropriate for the average retail investor due to the risks associated with high volatility.
In conclusion, before diving into oil investments, it’s worth researching the dynamics surrounding various funds and understanding the potential developments in the market. Each option has its unique advantages and risks, and making an informed choice is key to navigating this tumultuous space.
