Oil ETFs Rally as Israel-Hamas War Escalates
With oil prices experiencing a predictable spike against the backdrop of the Israel-Hamas war, financial advisors and market watchers are seeing an impact also spreading to the broader commodities and energy sectors.
Crude oil prices, as tracked by the United States Oil Fund (USO), are up 7.6% from the day before the Oct. 7 attack on Israel by Hamas militants, including a 2.5% rally in mid-day trading Wednesday.
Meanwhile, the Energy Select Sector SPDR Fund (XLE), is up 6.7% since the initial Hamas attacks, and the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) is up 4.7% over the same period.
“Commodities are great for that unknown unknown,” said Kathy Kriskey, commodity strategist at Invesco. “That surprise risk is where commodities shine.”
Greg Sharenow, who manages $16 billion in commodity portfolios at Pimco, is closely watching the escalating violence in the Middle East and said the biggest impact on commodities will be any spill over to neighboring countries. “Any escalation of violence in the area could impact oil production,” he said.
Denis Poljak, managing director at Poljak Group Wealth Management, is watching the energy sector as a potential indicator of things to come.
“So far, the war in Israel hasn’t had an effect on the S&P 500 and the global financial markets, but it certainly remains to be seen what will happen,” he said. “Numerous economists predict oil could go up to between $120 and $150 a barrel, which would significantly affect the global economy and could tip it into a recession.”
With that in mind, Poljak added: “This is absolutely the time to proactively review your asset allocation, because it may not be a bad time to protect some of the profits, we’ve had in the markets this year.”
For the risk-averse, he recommends moving assets to the safety of U.S. Treasuries. But for more aggressive investors with longer time horizons, Poljak said there are opportunities in oil and energy in this market.
Bracing for Spiking Oil ETFs
Mike Thompson, portfolio manager at Little Harbor Advisors, is also bracing for a potential oil-price spike of 60% or more.
"A real oil spike hasn't really taken place yet,” he said. “A true spike would be when oil is suddenly trading in the $150 to $200 range as the result of the closure of the Strait of Hormuz by Iran or some other supply shock event like that.”
Brooke May, managing partner at Evans May Wealth, described the energy sector as a “great entry point for long-term investors.”
“If crude oil surges to over $100 a barrel it could go meaningfully higher, having a negative impact on the economy, especially given that the U.S. Strategic Oil Reserves are at a 40-year low,” she added. “However, this could benefit energy companies in the quarters ahead.”
Ultimately, as volatility climbs along with rising geopolitical uncertainty, the emerging theme is that the investment opportunity can best be described as long term.
“We are positioning client portfolios to be overweight energy and oil,” said Noah Damsky, principal at Marina Wealth Advisors.
“Oil production has not kept up with increasing global demand, so there is a structural imbalance in supply and demand,” he added. “The electrification of global energy output has likely been overestimated, and oil will continue to grow in demand in the coming years.”
Contact Jeff Benjamin at Jeff.Benjamin@etf.com and find him on X at @BenJiWriter.
