Oil prices surged as tensions in the Middle East escalated after a U.S. drone strike near the Baghdad international airport killed Iran’s top commander General Qassim Soleimani. His death has aggravated tensions between the United States and Iran, flaring up concerns of Iranian retaliation.
The United States and Iran have been at loggerheads for about one-and-a-half years now. The United States’ sanctions against Iran were first put into place in August 2018. These sanctions were on cars, metals and minerals as well as U.S. and European aircraft.
The second part of the sanctions that bans the import of Iranian energy was enacted in November 2018.These sanctions were part of President Donald Trump’s initiative to put an embargo on Iran’s missile and nuclear programs, and diminish its influence in the Middle East(read: US Tightens Sanctions on Iran: Country ETFs to Gain/Suffer).
As a result, “Saudi Arabia’s energy facilities as well as foreign tankers in and around the Persian Gulf have been the target of several attacks over the past year -- a region that includes OPEC’s five biggest producers,” per Bloomberg. These attacks were supposedly carried out by Iran.
The latest U.S. move follows a New Year Eve attack by Iran-backed militias on the U.S. Embassy in Baghdad. TheU.S. Defense Secretary Mark Esper had indicated at strengthening of forces in Iraq after an attack on its embassy in Baghdad this week.
Strategists are expecting the U.S.-Iran tensions to flare up in the medium term. The two Middle East countries’ (Iraq and Iran) joint oil output was more than 6.7 million barrels a day last month (more than 20% of the total OPEC output), according to data compiled by Bloomberg. As a result, oil prices rose as high as 4% post the latest incident.
Against this backdrop, it would be prudent to discuss ETFs that tend to gain on rising crude prices as well as the ones that are likely to underperform.
Gainers
Energy — SPDR S&P Oil & Gas Exploration & Production (NYSE:XOP) ETF (CSE:XOP)
This is the most obvious choice. If oil price is staging an uptrend on reduced supplies, oil exploration and production stocks will definitely benefit, as these companies will pump more oil in the days ahead.
Defense — iShares U.S. Aerospace & Defense ETF (HM:ITA)
There could be higher chances of fighting between the Iranian and U.S. forces in the Gulf. These tensions heated up when Defense Secretary Mike Esper cautioned that Iran might be preparing for additional military strikes on U.S. targets.
Losers
Retail — SPDR S&P Retail (NYSE:XRT) ETF XRT
Rising energy prices do not bode well for retailers as consumers’ wallets get squeezed from higher outlays on gas station. So, the latest jump is going to hurt consumers directly.
Oil Refiners — VanEck Vectors Oil Refiners ETF CRAK
Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. After taking crude, refiners transform it to the finished product gasoline. Now with crude prices rising, refiners may see a lower crack spread and their profitability may be hurt.
Airlines — U.S. Global Jets ETF (KL:JETS)
The airline sector also performs better in a falling crude scenario. This is especially true as energy costs form a major portion of the overall costs of this sector. So, rising crude prices are likely to curb earnings of airline companies.
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SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ETF Research Reports
U.S. Global Jets ETF (JETS): ETF Research Reports
iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports
SPDR S&P Retail ETF (XRT): ETF Research Reports
VanEck Vectors Oil Refiners ETF (CRAK): ETF Research Reports
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Zacks Investment Research