Israel-Iran Conflict Lifts Crude Above $77: What It Means For Oil ETFs Israel-Iran Conflict Lifts Crude Above $77: What It Means For Oil ETFs - iShares U.S. Oil & Gas Exploration & Production ETF (BATS:IEO), Chevron (NYSE:CVX)

Oil markets are again in the crosshairs of geopolitics. West Texas Intermediate crude prices rose more than 3% on Thursday to reach above $77 a barrel, with the tensions between Israel and Iran erupting and the world anxiously waiting to see if America would enter the conflict. Merchants are preparing for an escalation, particularly after the previous President Donald Trump ambiguously responded to reporters by saying, “I may do it. I may not,” when asked if America would attack Iran.

The consequence: A significant geopolitical risk premium of around $10 per barrel according to Goldman Sachs, has established itself, spurring fresh interest in oil and energy-themed ETFs as tactical plays and defensive strategies alike.

Also Read: Oil Prices Jump, European Markets Plummet As US-Iran Tensions Rise: What’s Driving Markets Thursday?

ETF Market Moves: Flows, Premiums, And Positioning

As volatility for oil surges, investors are using liquid and leveraged ETFs to register their opinions, or hedge their exposure.

United States Oil Fund USO, the biggest oil ETF to track WTI futures, witnessed gains of more than 11% in the past five days as oil prices rose.

Energy Select Sector SPDR Fund XLE, a wide energy sector play supported by ExxonMobil XOM and Chevron CVX, increased by 2.7% in the past five days, while the options volume reflected a bias toward bullish call action.

SPDR S&P Oil & Gas Exploration & Production ETF XOP and iShares U.S. Oil & Gas Exploration & Production ETF IEO, which provide more targeted exposure to U.S. shale and drilling firms, also surged during the price spike, gaining 5% and 3%, respectively over the past five days.

For more adventurous speculators, leveraged funds such as the ProShares Ultra Bloomberg Crude Oil ETF UCO are also getting renewed traction, particularly as WTI pushes for the $80 barrier, a psychological support level for breakout enthusiasts. The fund witnessed price gains of almost 17% in the past five days.

Also Read: Trump Wants ‘An End, Not a Ceasefire’ For The Israel-Iran War: What That Means For ETFs

Hormuz In The Crosshairs

The most frightening wild card in the mix might be the Strait of Hormuz, that tight shipping lane seeing close to 20% of total global flows of oil, according to U.S. Energy Information Administration.

At the Japan Energy Summit & Exhibition in Tokyo, Shell chief executive Wael Sawan predicted a “huge impact” on world trade should the waterway be closed, as cited by Bloomberg. Meanwhile the American Petroleum Institute reiterated to Bloomberg that even an appearance of threat to tankers had the power to create market mayhem. US involvement could cause Iran to attack infrastructure or shipping routes in retaliation, according to RBC Capital’s Helima Croft, cited by Reuters.

If such disruption occurs, ETFs related to oil logistics, shipping, and midstream infrastructure may experience knock-on effects, either favorable, as risk premiums increase, or unfavorable, if operations are suspended.

Trump’s Wild Card Effect: Trader Paralysis Or Opportunity?

Uncertainty about the president’s next step has added further volatility to markets. Trump’s unorthodox style of foreign policy in his first term has put investors off from making bets either on rapid escalation or rapid de-escalation.

“Even if Middle East tensions were to cool off in the coming days, oil prices are probably not headed back to the low-$60 range they were trading at a month ago,” said Price Futures Group senior analyst Phil Flynn as cited by Reuters, adding that the market had been underpricing geopolitical shocks, and now that premium is coming back.

This repricing has given new life to energy ETFs, which had trailed the wider equity indices over the past few months. Some strategists like Goldman Sachs think Brent may rise above $90 if the conflict worsens, something that would make energy ETFs one of the brighter spots in a risk-off environment.

For risk-management traders, tactical ETF plays can potentially present opportunities, but for long-term allocators, perhaps there is a larger message here: geopolitical hedging through energy exposure.

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