Oil prices that have been red-hot this year due to supply disruptions amid the Iran war may see some pricing pressure over the medium term. The International Energy Agency warned that “demand destruction will spread” amid tighter supply and higher prices driven by the Middle East conflict, as quoted on CNBC.
Supply Shock Meets Weakening Demand
The ongoing conflict has already caused one of the largest disruptions to global oil supply, along with a sharp spike in prices in March. United States Oil Fund LP USO is up about 86.3% this year while United States Brent Oil Fund LP BNO has advanced 73.7% during the same timeframe.
At the same time, the IEA now expects global oil demand to contract this year, potentially marking the steepest decline since the COVID-19 pandemic, the same CNBC article noted.
Demand Destruction Likely to Broaden
Initial declines in oil consumption have been concentrated in the Middle East and Asia-Pacific regions, particularly in fuels like naphtha, LPG and jet fuel, per IEA, as quoted on CNBC. However, the IEA expects demand weakness to broaden globally as higher prices and supply shortages persist.
Hopes of Renewed Peace Talks
Oil also moved lower on reports that negotiations between the United States and Iran could resume soon, following unsuccessful negotiations in Pakistan. Despite the initial setback, diplomatic efforts continue. Mediators from Pakistan, Egypt and Turkey are working to revive negotiations between the two nations, Axios reported, as quoted on a CNBC article.
Blockade Raises Supply Risks
The United States has begun enforcing a blockade on Iranian ports in the Persian Gulf. While the restrictions apply only to vessels heading to Iranian ports, the move threatens oil exports through the Strait of Hormuz, tightening already strained global supply conditions.
The blockade is expected to keep oil prices supported, even as weakening demand offsets some price pressure. ETFs like State Street SPDR S&P Oil & Gas Exploration & Production ETF XOP and VanEck Oil Refiners ETF CRAK should thus be tracked closely.
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United States Oil ETF (USO): ETF Research Reports
United States Brent Oil ETF (BNO): ETF Research Reports
State Street SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ETF Research Reports
VanEck Oil Refiners ETF (CRAK): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).