2023-10-19 13:00:31 ET
Summary
- Crude oil prices rose to a fourteen-year high in March 2022 but fell below $70 after the U.S. released barrels from its Strategic Petroleum Reserve.
- The world's nuclear power is becoming divided as Russia and China form an alliance, making the global situation more dangerous.
- The recent terrorist attack on Israel has ignited a war against Hamas, increasing the threat of a significant escalation involving Iran and its allies and also of higher energy prices, favoring Invesco DB Energy Fund ETF.
In March 2022, crude oil prices (CL1:COM) rose to a fourteen-year high at over $130 per barrel. After the U.S. released unprecedented barrels from its Strategic Petroleum Reserve ("SPR"), prices fell below the $70 level. The U.S. SPR declined over 40% from over 600 million at the end of November 2021 to 351.3 million barrels as of October 16.
The bifurcation of the world's nuclear power began in early 2022 when Russia and China formed a " no-limits " alliance. Russia's invasion of Ukraine less than one month after President Xi and Putin shook hands made the world much more dangerous.
On October 7, the terrorist attack on Israel ignited a war against Hamas. The potential of a significant escalation involving Iran and its allies and the U.S. and its allies is now a growing threat.
Crude oil is the energy commodity that fuels the world. Over the past weeks, the price has been rising, and the potential for an upside spike based on the dangerous geopolitical landscape is growing. The Invesco DB Energy Fund ETF (DBE) is an exchange-traded fund, or ETF, product that should appreciate as traditional energy commodities' prices increase.
Energy prices have moved higher in the wake of war in the Middle East
Crude oil prices had risen since early May 2023, when the correction from over $130 per barrel in March 2022 reached a bottom.
The November NYMEX crude oil future chart highlights the nearly 50% rally from $63.50 per barrel on May 4 to $95.03 on September 28. Crude oil rallied as OPEC+ cut production, citing Chinese economic weakness.
The rally ran out of upside steam at just over $95 per barrel, falling to $81.50 on October 6. The October 7 terrorist attacks in Israel ended the correction, and crude oil was back above the $88 per barrel level on October 19. War in the Middle East caused supply fears for the energy commodity that powers the world.
OPEC and Russia control prices - The U.S. SPR is low, and the peak season for natural gas demand is on the horizon
Since 2016, when crude oil prices fell below the $30 per barrel level, Russia has cooperated with the international oil cartel, coordinating production policies and turning OPEC into OPEC+. Over the past seven years, production decisions have resulted from negotiations between Riyadh, Saudi Arabia, and Moscow. Meanwhile, the Biden administration's policies addressing climate change by supporting alternative and renewable fuels and inhibiting U.S. fossil fuel output and consumption handed pricing power to the cartel. Cool relations between Washington and Saudi Arabia and the incendiary relationship between Washington and Moscow have only increased OPEC+'s desire to keep oil prices high.
Saudi Arabia needs an $80 per barrel oil price to balance its domestic budget. Russia depends on oil revenues to fund its ongoing war in Ukraine. Moreover, Russia uses commodity production as an economic weapon against countries supporting Ukraine.
The U.S. used its SPR to reduce oil prices after Russia's invasion, pushing prices over $130 per barrel. When prices fell to the administration's $67-$72 target range, the Department of Energy only purchased four million barrels after selling more than a quarter of a billion since early 2022. With oil prices heading higher and the U.S. SPR at 351.3 million barrels, the U.S. has far fewer barrels to address rising oil prices than it did in March 2022.
Aside from crude oil and oil products, natural gas prices have recovered from the April 2023 low.
The continuous NYMEX natural gas futures contract illustrates the rise from $1.946 in April 2023 to the most recent $3.471 per MMBtu high. At just under the $3 per MMBtu level on October 19, the bullish trend of higher lows and higher highs remains intact as the peak winter demand season is on the horizon. European natural gas prices rose to all-time highs as the continent depends on Russian pipelines, and supply fears gripped the energy commodity in March 2022. European prices dropped after last year's warmer-than-average winter.
Last year's warm winter is no guarantee the 2023/2024 winter will be the same. U.S. natural gas now travels by ocean vessels to regions where prices are higher. The rally in European markets caused U.S. natural gas futures to rise to a fourteen-year high at over $10 per MMBtu in August 2022 before correcting. The upcoming peak demand season in the U.S. and Europe could cause natural gas prices to rally, with plenty of upside room from the current levels to the 2022 highs.
There is potential for much higher prices over the coming weeks and months
Markets tend to reach peaks and bottoms at levels that exceed rational, logical, and reasonable fundamental analysis. The odds of an escalating war in the Middle East are now at the highest level in history. Israel, the U.S., and European allies face Hamas supporters in Iran, a country with partners against Israel in other OPEC countries, Russia, North Korea, and perhaps China.
War distorts commodity prices as raw materials are global assets. Trade sanctions, rising insurance costs due to logistical risks, embargos, and other war-related factors could cause crude oil prices to soar. With OPEC+ driving oil production policies and pricing, the potential for another spike to over $100 per barrel and even higher is a clear and present danger.
The DBIQ reflects liquidly traded energy commodity futures contracts
The DBIQ Optimum Yield Diversified Energy Index Excess Return is a rules-based index composed of futures contracts on some of the most liquid energy commodities, including WTI crude oil, Brent crude oil, RBOB gasoline, Heating oil, and natural gas.
DBIQ is a direct investing tool and barometer of traditional oil and gas market prices.
The Invesco DB Energy Fund is the ETF product that moves higher and lower with the DBIQ energy index.
The DBE ETF has been around since 2007
DBE has been trading since 2007. At $23.44 per share, DBE had around $108 million in assets under management. DBE trades an average of 69,579 shares daily and charges a 0.77% management fee. The top holdings include:
DBE's performance since November NYMEX crude oil prices reached the most recent $81.50 October 6 low and recovered 10.3% to $89.88 on October 18 shows the correlation between the ETF and oil prices.
Over the same period, DBE rose 8.8% from $21.56 to $23.46 per share.
Turmoil in the Middle East and the war in Ukraine will likely continue to put upward pressure on crude oil, oil products, and natural gas prices. Invesco DB Energy Fund ETF is a virtual pure play on the oil/natural gas sector, as the ETF holds futures contracts in traditional energy commodities.
For further details see:
DBE: Energy Investing In A Highly Volatile World