Oil tumbles after nearing US$120. Here’s why prices are pulling back

Oil prices have pulled back after an explosive rally driven by the escalating conflict in the Middle East.

Just days ago, crude surged to its highest level in years as markets feared supply disruptions across one of the world’s key energy regions.

Now prices are easing, and the Betashares Crude Oil Index Currency Hedged Complex ETF (ASX: OOO) is falling heavily in response.

At the time of writing, the OOO share price is $7.95, down 21.83%.

Let’s take a closer look at what just happened.

Oil prices cool after huge surge

Oil prices have been extremely volatile in recent days amid geopolitical tensions that have rattled energy markets.

According to Trading Economics, West Texas Intermediate (WTI) crude is currently trading around US$89.15 per barrel, down 1.93% today.

That marks a significant reversal after prices surged earlier this week.

On Monday, oil prices briefly jumped close to US$120 per barrel, the highest point since the energy shock following Russia’s invasion of Ukraine in 2022.

The rally was driven by escalating tensions between the United States, Israel, and Iran, which raised fears that global oil supply could be severely disrupted.

In particular, traders have been watching the Strait of Hormuz, a narrow shipping channel that carries a huge portion of the world’s crude supply.

Around 20 million barrels of oil per day move through the waterway, making it one of the most important energy chokepoints on the planet.

Changing expectations hit oil prices

The recent decline appears to be linked to changing expectations about how the conflict may unfold.

Reports suggest the United States believes its military operations against Iran may be nearing completion. There have also been signs that diplomatic discussions could begin in the coming days.

At the same time, global policymakers have signalled they may act if oil prices remain high.

Finance ministers from the Group of Seven (G7) countries have reportedly discussed the possibility of releasing oil from strategic reserves if necessary to stabilise markets.

This could help stabilise markets and ease concerns about shortages.

After oil surged more than 30% in a short period, some investors also appear to be taking profits.

Why the Betashares Crude Oil ETF is sliding

The Betashares Crude Oil ETF gives investors exposure to movements in global crude oil prices through futures contracts.

Because of this structure, the ETF typically moves closely in line with changes in the oil price.

When oil surged earlier this week, the fund rallied strongly as investors rushed to gain exposure to the commodity.

However, today’s drop in crude prices has triggered a strong reversal.

With oil falling back toward US$90 per barrel, the ETF has come under heavy selling pressure.

The 21.83% decline in the fund highlights how quickly sentiment can change in energy markets.

What investors may be watching next

Despite the latest fall, oil prices remain significantly higher than they were just weeks ago.

WTI crude has still climbed more than 30% since late February, highlighting the enormous impact geopolitical tensions can have on energy markets.

The next move will likely depend on developments in the Middle East and whether shipping routes remain open.

If supply disruptions emerge, oil prices could jump once more.

The post Oil tumbles after nearing US$120. Here’s why prices are pulling back appeared first on The Motley Fool Australia.

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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.