Oil prices had been trending lower following a period of relative stability after the ceasefire. However, renewed hostilities between the United States and Iran have reversed much of the earlier decline.
The U.S. benchmark, West Texas Intermediate (WTI) crude, is trading around $84 per barrel and has gained approximately 4.7% over the past five trading sessions and nearly 10% over the past month. Meanwhile, the global benchmark, Brent crude, has posted slightly stronger gains. Trading around $91 per barrel, Brent has risen about 5.3% over the past five trading sessions and roughly 12% over the past month.
According to Goldman Sachs, prolonged disruptions to oil flows through the Strait of Hormuz could push Brent crude above $120 a barrel by the fourth quarter, as quoted on Bloomberg and cited by Yahoo Finance. While the Wall Street giant’s base case calls for Brent crude to average $80 per barrel in the fourth quarter and $75 in 2027, assuming tensions in the Middle East ease, the bank believes the risks are skewed to the upside.
While Brent reaching $120 is not Goldman's base-case forecast and may appear slightly optimistic, given the trajectory of the conflict, the risks are increasingly skewed toward further military escalation rather than a near-term ceasefire or durable diplomatic solution. This makes the bank's projection appear far more credible than it might have just weeks ago.
More Catalysts Point to Higher Oil Prices
The fundamental backdrop for oil prices remains constructive. Persistent supply constraints and relatively tight inventories continue to support the market. Additionally, prolonged disruptions to critical shipping routes stemming from ongoing retaliatory strikes between the United States and Iran could keep geopolitical risk premiums elevated.
Even if hostilities begin to ease, the presence of naval mines and other security threats could leave key waterways unsafe for an extended period, providing further support for higher oil prices.
Prolonged disruptions are likely to keep shipping costs elevated as carriers contend with logistical hurdles and higher insurance premiums, pushing freight rates higher. The resulting increase in shipping costs may push oil prices higher.
The Houthi Threat Intensifies
Another key risk comes from the Red Sea. As quoted on the abovementioned Yahoo Finance article, according to a Goldman Sachs analyst, persistent disruptions to shipping through the Strait of Hormuz and potentially the Red Sea could push Brent above $120 per barrel if geopolitical tensions continue to escalate.
Per a Reuters article, a naval blockade on Saudi Arabia by Yemen's Iran-aligned Houthis raises further concerns about disruptions to global energy supplies. According to the article, the group warned they could target the Bab el-Mandeb Strait, another critical shipping chokepoint, if the United States continues strikes on Iran’s infrastructure.
A sustained disruption at Bab el-Mandeb could reduce global oil supply by an estimated 7%, adding to the roughly 10% decline in oil flows already caused by the conflict in the Persian Gulf. Such a scenario would further tighten an already constrained market, reinforcing the case for higher-for-longer oil prices.
Leveraged Energy Funds Worth a Look
Investors willing to take on higher risk who expect prolonged disruptions to critical shipping routes and oil prices to remain elevated for longer may consider increasing exposure to leveraged energy ETFs. However, given their structure, these instruments are best suited for short-term trading and require a disciplined investment horizon.
Investors can consider Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X ETF GUSH, Direxion Daily Energy Bull 2X ETF ERX and ProShares Ultra Energy DIG.
Regarding charging annual fees, ERX is the cheapest option, charging 0.91%. With an average one-month trading volume of 868,000 shares, GUSH is the most liquid option.
Energy ETFs to Watch
For investors unwilling to take on the additional risk associated with leveraged energy ETFs, a more prudent approach may be to maintain a bullish view on oil through traditional energy ETFs. This allows participation in a higher-for-longer price environment while avoiding short-term, headline-driven volatility.
Investors can consider State Street Energy Select Sector SPDR ETF XLE, Vanguard Energy ETF VDE and iShares U.S. Energy ETF IYE.
XLE and VDE have a Zacks ETF Rank #1 (Strong Buy), while IYE has a Zacks ETF Rank #2 (Buy). Regarding charging annual fees, XLE is the cheapest option, charging 0.08%. XLE has gathered an asset base of $37.73 billion, the largest asset base among the other options. With an average one-month trading volume of 31.39 million shares, XLE is the most liquid option.
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State Street Energy Select Sector SPDR ETF (XLE): ETF Research Reports
Direxion Daily Energy Bull 2X ETF (ERX): 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).