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4 Reasons Why Oil & Energy ETFs Can Continue to Soar

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Oil prices surged recently to their highest levels since October as investors closely monitored escalating geopolitical tensions in key regions. WTI crude ETF United States Oil Fund LP (USO - Free Report) has jumped 22.1% this year (as of Apr 1, 2024) and the brent crude ETF United States Brent Oil Fund LP (BNO - Free Report) has gained 20.1%.

Against this backdrop, below we highlight a few reasons that could support the fact that oil and energy ETFs may gain higher in the near term. These ETFs include oil ETFs like United States Gasoline Fund LP (UGA - Free Report) , United States Oil Fund LP (USO - Free Report) , United States Brent Oil Fund LP (BNO - Free Report) , United States 12 Month Oil Fund LP (USL - Free Report) and energy ETFs like iShares U.S. Oil & Gas Exploration & Production ETF (IEO - Free Report) , iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) , Invesco Energy Exploration & Production ETF (PXE - Free Report) and SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) .

Potential Supply Crunch Due to Middle East Tensions

The Middle East witnessed heightened tension with indirect Iranian involvement, raising concerns about a potential impact on oil supply. Iran blamed Israel for a deadly air strike on its consulate in Damascus, vowing revenge. Analysts warn of the possibility of direct Iranian involvement in the Israel-Hamas conflict, which could trigger a region-wide conflict with significant implications for oil supply.

Ukrainian Drone Strike on Russian Refinery

In a separate development, Ukraine conducted a drone strike on one of Russia's largest oil refineries in the Tatarstan region, as quoted on CNBC. Although the attack did not cause serious damage, it underscores the ongoing conflict between the two nations and the targeting of energy infrastructure. Russia, a key member of OPEC+, has faced repeated Ukrainian drone strikes in recent months, leading to concerns about supply disruptions.

Fed to Cut Rates in 2024

Federal Reserve Chair Jerome Powell reiterated the Fed will likely slash interest rates this year amid inflation's "bumpy" path downward. In a speech at Stanford University on Wednesday, Powell put stress on his belief that inflation was on a "bumpy" path down to 2%, but that central bank officials expect to lower rates at "some point" this year, as quoted on Yahoo Finance. If the Fed starts to ease monetary policies, economic growth momentum should speed up, which in turn would boost oil demand.

The European Central Bank too could start cutting interest rates in June as inflation may fall quicker than expected, per Austrian policymaker Robert Holzmann, as quoted on Reuters. China too has been on a policy easing mode. All these should keep the demand outlook for oil charged-up. Global growth is projected to be 2.9% in 2023, and weaken to 2.7% in 2024. As inflation abates further and real incomes strengthen, the world economy is projected to grow by 3% in 2025, per OECD.

Moderate Increase in Oil Supplies

Per IEA, global supply for 2024 is forecast to increase 800 kb/d to 102.9 mb/d, including a downward adjustment to OPEC+ output. Refinery crude runs are forecast to rise from a February-low of 81.4 mb/d to a summer peak of 85.6 mb/d in August. Global oil inventory dropped by 48.1 mb in January, with OECD industry stocks at a 16-month low. However, global observed oil inventories gained by 47.1 mb in February.


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