Is An Oil ETF Rally On Middle East Tensions Sustainable?

President Trump recently confirmed the destruction of an Iranian drone in the Strait of Hormuz by the U.S. Navy. This drove oil prices by 2%. The U.S. Navy claims that it acted in self-defense as the aircraft came alarmingly close to the vessel and ignored multiple warnings to stand down.

The incident followed U.S. Central Command chief General Kenneth McKenzie’s comments that the United States will take the required measures against the latest attacks on oil tankers in the Gulf. In June 2019, Iran had shot one U.S. Navy drone down. However, Tehran continues to deny any attack. In this regard, Iran’s Deputy Foreign Minister Abbas Araqchi had tweeted on Jul 19 that Tehran has “not lost any drone in the Strait of Hormuz nor anywhere else” (read: Iran Downs U.S. Drone: Sector ETFs & Stocks to Gain).

Other Factors Driving Oil

Here are certain developments that have been fueling the rally in oil prices:

Possible Rate Cuts by Fed

New York Fed President John Williams (NYSE:WMB)’ latest speech, hinting at a more aggressive approach to rate cuts, contributed to the rally in oil prices. However, the Fed had to later clarify that the market misinterpreted the speech as a rate cut signal. It is worth noting here that Federal Reserve’s Chairman Jerome Powell recently indicated Fed’s intention to cut interest rates, should the need be. Investors forecast a quarter-point slash in interest rates after a stronger jobs report curbed projections for a rate cut by 50 basis points.

OPEC’s Initiative to Cut Oil Output

OPEC has of late decided to extend the oil production cut through 2020 in a bid to boost oil prices. Russia is once again cooperating with OPEC on the same.

Tensions Brew Over Iran’s Nuclear Program

Iran recently increased its enrichment levels for uranium from

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