Oil prices have fallen sharply after surging earlier this week as the Middle East war distressed global energy markets.
Just days ago, crude briefly spiked close to US$120 per barrel, triggering fears of a major supply shock.
Now prices are cooling quickly. According to TradingEconomics, West Texas Intermediate (WTI) crude is currently trading around US$83.15 per barrel.
The sudden reversal is also weighing on oil-linked investments, including the Betashares Crude Oil Index Currency Hedged Complex ETF (ASX: OOO).
At the time of writing, the OOO share price is $7.49, down 4.95% for the day.
Let's take a closer look at what is happening.
Oil prices retreat after Middle East fears ease
The earlier surge in oil prices was driven by rising tensions in the Middle East and fears that global oil supply could be disrupted.
Markets were particularly focused on the Strait of Hormuz, one of the most important shipping routes for global energy.
Around 20% of the world's oil supply moves through the Strait each day, making it one of the most critical choke points in the global energy system.
Several major Middle East producers, including Saudi Arabia, the UAE, Kuwait, and Iraq, rely heavily on this route to export crude to global markets.
However, traders are now reassessing the immediate risk to supply.
Reports also indicate the International Energy Agency (IEA) is considering a coordinated release of emergency oil reserves. Member nations collectively hold about 1.2 billion barrels in strategic stockpiles, along with roughly 600 million barrels of industry inventories.
If released, these reserves could help offset potential supply disruptions and ease pressure on global energy markets.
Why the Betashares Crude Oil ETF is falling
The pullback in oil prices is also dragging down the Betashares Crude Oil ETF.
The fund gives investors exposure to oil by tracking the S&P GSCI Crude Oil Index, which reflects movements in global crude futures. It also hedges currency exposure between the US dollar and the Australian dollar.
Because of this, the ETF typically moves in line with oil prices.
Crude surged earlier this week during the sharp rally, helping lift the value of the futures contracts tracked by the index. Now that prices have pulled back, the ETF has also come under pressure.
Despite recent volatility, the fund has still delivered strong returns this year, up about 46%.
What could happen next?
Oil markets remain highly sensitive to developments in the Middle East and the potential impact on global supply.
The market is closely monitoring shipping activity through the Strait of Hormuz, as well as any coordinated response from major energy agencies such as the IEA.
Further escalation in the region could quickly push crude prices higher again.
On the other hand, a coordinated release of strategic reserves or easing tensions in the region could lower oil prices.
The post Oil slumps to US$83 per barrel. Here's what is driving the sharp pullback appeared first on The Motley Fool Australia.
Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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