Thanks to the turmoil in one of the world’s largest oil producers, Iraq, oil prices are rising over the past one week. Brent crude price rose nearly 4% last week to the 10-month high and is currently trading at over $113 per barrel while West Texas Intermediate crude oil is hovering at above $106 per barrel.
This has duly turned investors focus to the commodity and the impact of this on the energy sector (read: 3 Commodity ETFs Beating the Market in 2014).
Unrest in Iraq and Oil Production
The instability in Iraq was intensified last week when the Sunni Islamist militants, led by the Islamic State of Iraq and the Levant, captured three major northern Iraqi cities – Mosul - the country's second-largest city, Tikrit, and Baiji - Iraq's biggest oil refinery, thereby solidifying their grip on the north. The rebels are now moving south to the capital city of Baghdad for seizure.
If tensions escalate or violence spreads south, oil production would be disrupted, and oil prices would rise. This is especially true as the South Iraq accounts for one-third of the total country’s production and IEA expects production from Baghdad to reach 8.5-9 million barrels per day by 2020 (read: Uprising in Iraq Puts These Oil ETFs in Focus).
Iraq on the whole produces about 3.3 million barrels of oil per day, making it the second-largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC) group after Saudi Arabia. The country also has the world's fifth-largest proven oil reserves. As per the International Energy Agency (IEA), more than 60% of the global output is expected to come from Iraq until 2019.
Other Factors Driving Oil
Apart from Iraqi tension, other countries are also suffering from supply crunch. Oil production in Libya has curtailed while Nigeria production has been disrupted by theft. International sanctions for exporting oil against Iran over its nuclear program have also hurt supplies of oil.
Further, global demand for oil is rising at record highs amid China slowdown. The agency expects global oil demand to rise by 1.3 million barrels per day to 92.8 million barrels per day this year. Moreover, the latest crude oil inventory data showed that crude stockpiles fell 2.6 million barrels for the week ending June 6, which is twice the analyst expectation.
All these fundamentals are pushing up oil and the energy ETFs, which are already in record territory. We have highlighted energy ETFs that investors need to watch carefully in the coming days, especially their price movement with the developments in Iraq (see: all the energy ETFs here).
Energy Select Sector SPDR ((XLE - ETF report))
This fund provides exposure to the broad U.S. energy sector by tracking the S&P Energy Select Sector Index. In total, the product holds 46 securities in its basket, which is largely concentrated on the top two firms – Exxon Mobil (XOM) and Chevron (CVX) – that collectively make up for 28% of assets (read: Energy ETFs in Focus on Big Oil Q1 Earnings).
XLE is the largest and most popular ETF in the energy space with AUM of $12.1 billion and average daily volume of 10.5 million shares per day. It is one of the low cost choices charging 16 bps in fees per year from investors. The fund added 2.2% in the last five trading sessions and reached its record high of $99.23 on June 16. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.
SPDR S&P Oil & Gas Exploration & Production ETF ((XOP - ETF report))
This fund follows the S&P Oil & Gas Exploration & Production Select Industry Index, holding 83 stocks in its portfolio. It has amassed $1.4 billion in its asset base and trades in heavy volume of more than 3.8 million shares per day. The ETF charges 35 bps in annual fees from investors.
The product provides equal weight exposure across a number of firms as none holds more than 2.20% of total assets. Further, it is widely diversified across market caps with small caps accounting for 39%, large caps taking 31% and mid caps having 29% allotment. However, more than three-fourths of the portfolio goes to exploration and production firms while refining and marketing, and integrated oil & gas take the remainder (read: Energy Exploration ETFs: A Bright Spot in The Choppy Market).
The ETF touched the record high of $81.19 on June 17, having gained nearly 4% over the past five trading sessions. It has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook.
iShares Global Energy ETF ((IXC - ETF report))
This ETF follows the S&P Global 1200 Energy Sector Index, giving investors exposure to the global energy space. The fund is relatively popular and liquid with AUM of $1.1 billion and average daily volume of more than 171,000 shares. Expense ratio came in at 0.47%.
The product holds 93 stocks in its basket with half of the portfolio going to the top 10 holdings. The oil gas and consumable fuels sector dominates the fund’s return with 86.7% share while U.S. firms make up for 55.3% of assets. The ETF is a large cap centric fund with a slight tilt toward value stocks. IXC also hit an all-time high of $48.63 on June 16 and gained 2.2% over the past five days.
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