Oil Prices Surge Above $100 Barrel Amid Ongoing Middle East Conflict

The ongoing war in the Middle East has had a significant impact on oil prices. Oil prices surged again last week after Saudi Arabia shut down its East-West crude oil pipeline following drone strikes, according to Capital Economics. This has pushed oil prices above $100 a barrel and is expected to remain so well into next year if the conflict drags on.

The United States Oil Fund USO and United States Brent Oil ETF BNO have significantly outperformed the price of crude oil they are designed to track, thanks mainly to backwardation. Backwardation occurs when near-month contracts trade at higher prices than later-month contracts, amid expectations that disruptions will be temporary.

The oil market has been in backwardation since the war began, benefiting ETFs that invest in futures. Each month, these funds sell their expiring near-term contracts and replace them with cheaper, later-month contracts.