Ever since the onset of the Middle East conflict, heightened volatility in oil prices has remained a constant for global markets. Against this backdrop, Energy ETFs continue to stand out as an area where investors may consider increasing exposure, as crude prices remain highly sensitive to headline-driven developments surrounding potential peace negotiations between Washington and Tehran.
While recent reports suggest progress in talks aimed at ending the conflict, both sides remain divided over key issues, including Iran’s enriched uranium reserves and transit through the Strait of Hormuz. This implies that reaching a conclusive peace agreement could take more time.
Why Short-Term Oil Swings Shouldn’t Deter Energy Investors
Initial optimism surrounding a potential breakthrough in negotiations briefly pressured oil prices lower, with the U.S. benchmark, West Texas Intermediate (WTI) crude, falling about 2.7% over the past five trading sessions, as per OilPrice.com. However, as tensions resurfaced and negotiations continued to face major roadblocks, oil prices regained momentum, with WTI resuming its upward move.
West Texas Intermediate (WTI) crude has gained about 13.10% over the past month and 33.56% over the past three months.
Optimism surrounding a near-term resumption of U.S.-Iran diplomatic talks remains limited, pointing that investors may be better off avoiding major shifts in their outlook on energy ETFs based solely on short-term conflict-related headlines. Given the uncertain and fragile nature of negotiations so far, maintaining a long-term investment horizon appears more prudent, particularly as structural factors such as supply constraints and persistent geopolitical risks continue to support elevated oil prices.
At the same time, possibility of more severe supply disruptions may continue to support the long-term investment case for energy ETFs, particularly as volatility in oil markets is likely to persist.
Stockpile Concerns Keep Supply Risks Elevated
According to Fatih Birol, the International Energy Agency (IEA) head, the combination of heightened summer fuel demand, declining stockpiles and limited Middle East oil exports could push global oil markets into the “red zone” during July and August, as quoted on Reuters. This could intensify upward pressure on oil prices in the coming months.
Per the abovementioned Reuters article, more than 14 million barrels per day of oil supply have been disrupted due to attacks on regional energy infrastructure and restricted flows through the Strait of Hormuz, creating an unprecedented supply crunch.
Although Birol did not elaborate what a potential “red zone” scenario would look like, he indicated that the combination of pre-war oil surpluses, reserve releases and stockpile drawdowns may prove insufficient to stabilize supply conditions.
Energy ETFs Worth Watching
Despite the possibility of a favorable peace deal and unrestricted access through the Strait of Hormuz, limited supply relief could keep oil prices high. While the reopening of the waterway could gradually improve vessel traffic, full normalization is likely to take time due to damage to critical energy infrastructure across the Middle East, while shipping flows through the strategically vital route are also unlikely to recover immediately.
As a result, investors may be better served maintaining a constructive outlook on oil prices and staying positioned in Energy ETFs to benefit from a potentially higher-for-longer price environment.
Investors can consider State Street Energy Select Sector SPDR ETF XLE, Vanguard Energy ETF VDE, State Street SPDR S&P Oil & Gas Exploration & Production ETF XOP, iShares Global Energy ETF IXC and iShares U.S. Energy ETF IYE.
With an average one-month trading volume of 37.43 million shares, XLE is the most liquid option. The fund also has the largest asset base among its peers, with $42.54 billion in assets under management. Regarding charging annual fees, XLE is the cheapest option, charging 0.08%, suitable for long-term investing.
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State Street Energy Select Sector SPDR ETF (XLE): ETF Research Reports
iShares Global Energy ETF (IXC): ETF Research Reports
State Street SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ETF Research Reports
iShares U.S. Energy ETF (IYE): ETF Research Reports
Vanguard Energy Index Fund ETF Shares (VDE): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).