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The energy sector covers companies involved in the exploration, production, and delivery of energy sources such as oil, gas, coal, and renewables. Amongst these, Oil & Gas has been a key component of the global energy markets. Thus, investing in energy equities requires a deep understanding of the industry's nature and the factors that influence its trends.
Below we highlight a detailed guide to the energy equities ETF investing.
Nature of Energy Equities
Energy companies are usually segmented based on their operations:
Upstream: Exploration and production companies. They're responsible for locating oil reserves and extracting crude oil. Hence, higher crude prices are positives for this segment.
Midstream: Focused on the transportation (pipelines, ships), storage, and wholesale marketing of crude or refined petroleum products.
Downstream: Involves refining crude oil and selling the products to end consumers. This includes gasoline, diesel, and jet fuel. Investors should note that these companies use oil as an input and thus underperforms in a rising oil price environment.
Integrated Oil & Gas Companies: These giants operate across all three segments mentioned above. Examples include ExxonMobil, Chevron, and Shell.
Renewable Energy: This is different from the traditional energy sector. The Renewable Energy includes solar, wind, hydroelectric, geothermal, and bioenergy. This sector has been growing due to increasing environmental concerns and technological advancements.
Key Drivers for Oil Price Movemnets
Demand & Supply: A balance or imbalance between global demand and supply can significantly impact prices. International Energy Agency (IEA) indicated that growth continues in China, India and Brazil, supporting forecast global oil demand gains for this year at around 2.3 mb/d, of which China makes up 77%.
Global oil demand growth is set to weaken to 900 kb/d in 2024 as the post-Covid rebound falters while the economic expansion slows due to higher interest rates, per IEA. Notably, energy efficiency improvements weigh on oil use. Global supply growth this year and next, of 1.5 mb/d and 1.7 mb/d, respectively, is dominated by non-OPEC+ producers.
OPEC Decisions: The Organization of the Petroleum Exporting Countries (OPEC) often decides on production limits for its member countries, influencing global supply. Oil prices had already surged to almost $98/bbl in mid-September after Saudi Arabia and oil-rich Russia prolonged their voluntary production cuts through year-end and as crude oil and distillate inventories dropped to exceptionally low levels.
Geopolitical Tensions: Conflicts, especially in oil-rich regions, can disrupt supply. In October 2023, oil prices again shot up as news of a surprise attack on Israel by the Palestinian Islamist group Hamas sent shockwaves through global markets (read: Oil Soars On Israel-Hamas Conflict: Sector ETFs to Gain/Lose).
The incident has triggered a war in the oil-rich Middle East, sending oil prices northbound. This is especially true given Iran – both a key oil producer and a supporter of Hamas – got involved in the picture. If this is not enough, the Russia-Ukraine war is in place, which is providing an upward thrust to the oil prices.
Currency Strength: Oil prices are usually denominated in dollars. A stronger dollar amid a hawkish Federal Reserve can depress oil prices and vice versa. Moreover, the U.S. economy has exhibited a better-than-expected recovery, which in turn, give the greenback another round of strength.
Benefits of Investing in Energy Equities & ETFs
The current global economic scenario and the geopolitical tension should boost profitability in oil exploration stocks and ETFs. Oil often behaves differently than other asset classes, providing diversification benefits. Plus, many big oil companies offer attractive dividend yields.
Any Caveats?
Oil prices are highly volatile in nature, influenced by numerous of unforeseen factors. The push towards cleaner energy might reduce the long-term demand for oil.
ETF Investing Options
Oil & Gas Exploration & Production ETFs: ETFs offer diversified exposure to oil and gas stocks. Examples include the Energy Select Sector SPDR Fund (XLE - Free Report) or Vanguard Energy ETF (VDE - Free Report) . The XLE and VDE have an asset base of $38.57 billion and $8.47 billion, respectively. Both funds yield 3.39% and 3.35% annually, respectively. The funds are more than 5% this year.
Oil & Gas Services ETFs: These segment holds ETFs like Invesco Oil & Gas Services ETF (PXJ - Free Report) and SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) and iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) . They provide services to the oil patch. The segment has been upbeat this year as these ETFs offered returns in the range of 13% to 25%.
Master Limited Partnerships (MLPs): They're unique to the United States, primarily investing in energy infrastructure, and often offer high dividend yields. One of the largest MLP ETFs – Alerian MLP ETF (AMLP - Free Report) – has an asset base of $7.09 billion and a dividend yield of 7.52% annually.
Renewable Energy ETFs – One of the largest ETFs here is iShares Global Clean Energy ETF (ICLN - Free Report) . The fund has about $3.0 billion in assets. But the year 2023 has been unfavorable for this segment as the fund is down more than 20%.
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Guide to Energy Equities ETF Investing
The energy sector covers companies involved in the exploration, production, and delivery of energy sources such as oil, gas, coal, and renewables. Amongst these, Oil & Gas has been a key component of the global energy markets. Thus, investing in energy equities requires a deep understanding of the industry's nature and the factors that influence its trends.
Below we highlight a detailed guide to the energy equities ETF investing.
Nature of Energy Equities
Energy companies are usually segmented based on their operations:
Upstream: Exploration and production companies. They're responsible for locating oil reserves and extracting crude oil. Hence, higher crude prices are positives for this segment.
Midstream: Focused on the transportation (pipelines, ships), storage, and wholesale marketing of crude or refined petroleum products.
Downstream: Involves refining crude oil and selling the products to end consumers. This includes gasoline, diesel, and jet fuel. Investors should note that these companies use oil as an input and thus underperforms in a rising oil price environment.
Integrated Oil & Gas Companies: These giants operate across all three segments mentioned above. Examples include ExxonMobil, Chevron, and Shell.
Renewable Energy: This is different from the traditional energy sector. The Renewable Energy includes solar, wind, hydroelectric, geothermal, and bioenergy. This sector has been growing due to increasing environmental concerns and technological advancements.
Key Drivers for Oil Price Movemnets
Demand & Supply: A balance or imbalance between global demand and supply can significantly impact prices. International Energy Agency (IEA) indicated that growth continues in China, India and Brazil, supporting forecast global oil demand gains for this year at around 2.3 mb/d, of which China makes up 77%.
Global oil demand growth is set to weaken to 900 kb/d in 2024 as the post-Covid rebound falters while the economic expansion slows due to higher interest rates, per IEA. Notably, energy efficiency improvements weigh on oil use. Global supply growth this year and next, of 1.5 mb/d and 1.7 mb/d, respectively, is dominated by non-OPEC+ producers.
OPEC Decisions: The Organization of the Petroleum Exporting Countries (OPEC) often decides on production limits for its member countries, influencing global supply. Oil prices had already surged to almost $98/bbl in mid-September after Saudi Arabia and oil-rich Russia prolonged their voluntary production cuts through year-end and as crude oil and distillate inventories dropped to exceptionally low levels.
Geopolitical Tensions: Conflicts, especially in oil-rich regions, can disrupt supply. In October 2023, oil prices again shot up as news of a surprise attack on Israel by the Palestinian Islamist group Hamas sent shockwaves through global markets (read: Oil Soars On Israel-Hamas Conflict: Sector ETFs to Gain/Lose).
The incident has triggered a war in the oil-rich Middle East, sending oil prices northbound. This is especially true given Iran – both a key oil producer and a supporter of Hamas – got involved in the picture. If this is not enough, the Russia-Ukraine war is in place, which is providing an upward thrust to the oil prices.
Currency Strength: Oil prices are usually denominated in dollars. A stronger dollar amid a hawkish Federal Reserve can depress oil prices and vice versa. Moreover, the U.S. economy has exhibited a better-than-expected recovery, which in turn, give the greenback another round of strength.
Benefits of Investing in Energy Equities & ETFs
The current global economic scenario and the geopolitical tension should boost profitability in oil exploration stocks and ETFs. Oil often behaves differently than other asset classes, providing diversification benefits. Plus, many big oil companies offer attractive dividend yields.
Any Caveats?
Oil prices are highly volatile in nature, influenced by numerous of unforeseen factors. The push towards cleaner energy might reduce the long-term demand for oil.
ETF Investing Options
Oil & Gas Exploration & Production ETFs: ETFs offer diversified exposure to oil and gas stocks. Examples include the Energy Select Sector SPDR Fund (XLE - Free Report) or Vanguard Energy ETF (VDE - Free Report) . The XLE and VDE have an asset base of $38.57 billion and $8.47 billion, respectively. Both funds yield 3.39% and 3.35% annually, respectively. The funds are more than 5% this year.
Oil & Gas Services ETFs: These segment holds ETFs like Invesco Oil & Gas Services ETF (PXJ - Free Report) and SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) and iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) . They provide services to the oil patch. The segment has been upbeat this year as these ETFs offered returns in the range of 13% to 25%.
Master Limited Partnerships (MLPs): They're unique to the United States, primarily investing in energy infrastructure, and often offer high dividend yields. One of the largest MLP ETFs – Alerian MLP ETF (AMLP - Free Report) – has an asset base of $7.09 billion and a dividend yield of 7.52% annually.
Renewable Energy ETFs – One of the largest ETFs here is iShares Global Clean Energy ETF (ICLN - Free Report) . The fund has about $3.0 billion in assets. But the year 2023 has been unfavorable for this segment as the fund is down more than 20%.