With the lack of progress in renewed diplomatic talks between Washington and Tehran, along with rising tensions over control of the Strait of Hormuz, it appears increasingly likely that oil prices will remain elevated in the near term.
The U.S. benchmark, West Texas Intermediate (WTI) crude, has risen about 10.88% over the past five trading sessions, while the global benchmark, Brent crude, crossed the $100 per barrel mark and gained roughly 11.09% over the same period, as per OilPrice.com.
Optimism around the near-term resumption of U.S.-Iran diplomatic talks appears limited. With the United States maintaining its naval blockade and Tehran signaling no immediate willingness to return to negotiations, tensions remain elevated, keeping traffic through the Strait of Hormuz near a standstill, as quoted on Yahoo Finance.
The closure of the Strait of Hormuz, one of the world’s most critical oil transit chokepoints and through which nearly one-fifth of global supply flows, continues to pose significant supply risks and keep prices elevated. The conflict has triggered what International Energy Agency (IEA) chief Fatih Birol described as the “worst energy crisis” the world has ever faced, as quoted on Reuters.
According to Dennis Kissler of BOK Financial Securities Inc., as quoted on the abovementioned Yahoo Finance article, with the United States and Iran at a stalemate, oil markets appear biased to the upside, with prolonged disruptions in the Strait of Hormuz likely to amplify upward pressure.
Elevated Oil Prices Here to Stay
Supply constraints are expected to keep oil prices elevated. IEA chief Fatih Birol, speaking to a Swiss newspaper, noted that restoring lost Middle East output could take up to two years, while cautioning that markets may be underpricing the risks of a prolonged disruption in the Strait of Hormuz, as quoted on a Reuters article.
According to FXEmpire, oil prices have remained on an upward trajectory, driven by stalled U.S.-Iran negotiations and rising supply fears. With flows through the Strait of Hormuz partially disrupted, supply risks remain high, helping to keep a firm floor under prices.
As quoted on the abovementioned FXEmpire article, oil prices remain supported as supply risks linger and tensions around the Strait of Hormuz keep markets on edge. Strong demand signals and bullish technicals in WTI and Brent suggest an upside bias.
Beyond Hormuz: Structural Supply Risks to Keep Oil Elevated
Even if the Strait of Hormuz reopens, oil prices are likely to remain elevated, with supply relief expected to be limited. While vessel traffic may gradually return to near pre-conflict levels, full normalization appears unlikely as damage to critical energy infrastructure across the Middle East continues to weigh on output. As highlighted by the IEA, restoring lost regional production could take up to two years.
Moreover, even a return to normal traffic flows is unlikely to be swift. Flows through the narrow waterway could take months, if not longer, to recover to pre-conflict levels. As per a Reuters article, the pace of normalization of the traffic flow will depend not only on diplomacy but also on logistical challenges, insurance coverage, freight dynamics and the willingness of shipowners to re-enter the route.
Energy ETFs Worth Watching
Instead of reacting to short-term volatility driven by headlines, investors may be better served by maintaining a bullish outlook on oil prices and staying positioned in energy ETFs to benefit from a 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 a one-month average trading volume of 55.85 million shares, XLE is the most liquid option, offering investors easier entry and exit while minimizing the risks of significant price fluctuations, ideal for active trading strategies.
XLE has gathered an asset base of $38.56 billion, the largest asset base among the other options. 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).