Over the trailing one-year period, crude oil markets and, in particular, the exchange-traded fund United States Oil Fund LP (ETF) (NYSEARCA:USO), have enjoyed a much-needed and desired recovery. Although no one likes pain at the pump, rising prices indicate higher demand, which bodes well for the underlying economy. That said, the USO ETF might be rising a little too quickly.
For Tuesday’s session, the oil fund, which tracks the West Texas Intermediate index, jumped over 3.6% against Monday’s closing price. Investors reacted sharply to news from the U.S. State Department, which declared that all oil imports from Iran must cease by November, according to a CNBC report. Given President Trump’s animus towards Iran and his predecessor’s signing a nuclear deal with the nation, the announcement wasn’t surprising.
Furthermore, Trump lashed out at the former President Obama’s nuclear deal during the 2016 election’s campaign trail. The former real estate mogul promised to undo the perceived damage to America’s reputation — and he made good on his word. In early May, Trump pulled out of the deal, sending ripple effects throughout the markets. Notably, though, investors pushed the USO ETF higher before it tumbled later in the month.
But what political experts wondered was how the current administration would roll back Iranian oil imports. A gradual decline in import volume seems the most balanced approach rather than a hard stop. Of course, balance isn’t exactly this administration’s modus operandi.
It’s obvious that President Trump wants to isolate Iran from the international community. However, his policy comes at an awkward time. Oil funds like the USO ETF have increased in price due to less-than-expected global supply. While that’s good news for oil investors, the dynamic risks a delicate economic recovery.
Expect the USO ETF to Move Even Higher
On a year-to-date basis, the USO ETF is up over 18%. This follows a strong showing in the second half of 2017, when the fund gained nearly 26%. If recent geopolitical events are anything to go by, investors should expect more profitability.
Hidden beneath the sharp leap in the USO ETF is the Supreme Court’s decision to uphold Trump’s controversial travel ban. The executive order, which affects mostly Muslim-majority nations, was a key selling point for Trump’s voting base. The targeted countries include Libya, Somalia, Syria, Yemen and, of course, Iran.
As a result, U.S.-Iran relations have plummeted to near all-time lows and a resolution doesn’t appear anywhere near the horizon. Recall that, in December 2015, Trump demanded a “total and complete shutdown” of Muslims entering the U.S. “until our country’s representatives can figure out what is going on.”
The only reason that Trump wasn’t politically crippled for the remark was that it followed the San Bernardino terror attack. However, the terrorists were likely radicalized in Pakistan. By putting Iran on the travel ban, the White House unfairly conflates the Middle Eastern nation with non-related terrorism.
This is a deeply insulting measure that will be extraordinarily difficult to walk back. Not only that, the administration is clearly aligned with Saudi Arabia, Iran’s mortal enemy. The move adds gasoline to the already simmering inferno between Sunni-majority Saudi Arabia and Shia-dominated Iran.
How does this translate for the American investor? Ultimately, I see the USO ETF to continue its trek upward. I don’t guarantee a smooth ride; given this fractious environment, volatility is a sure thing. But Iran is the oil cartel OPEC’s third-biggest producer, exporting daily two million barrels of black gold.
That critical supply chain, it appears, is on hold indefinitely.
Trump’s Foreign Policy Is Locked In
Another factor bolstering the USO ETF is that President Trump has essentially locked in his foreign policies. He attacked the Iranian nuclear deal because it represented everything that his base hated about Obama. Going back on his word would jeopardize his credibility with conservative voters.
Then we have the added complication of the historic summit between Trump and North Korean leader Kim Jong-un. American policy always dictated that we do not negotiate with terrorist states. That changed dramatically with Trump. While his base generally views the summit as a major win, it does back the Commander-in-Chief in a corner.
Trump conceded much when he met with Kim, if only that he gave North Korea international credibility. If he softened his stance on Iran, I’m not sure if conservative voters will be so kind. A core reason why Trump became President was his tough-guy image.
If that goes, so do his chances of reelection. This means we should at least expect the USO ETF to move higher for the next two years.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.