Oil’s recent spike is an end-product of a series of events that took place earlier this week. First, the mounting tension between the United States and Iran reached a new high after the latter shot down a drone of the former.

Also, OPEC and its allies’ decision to meet next month, Fed’s signal of a rate cut and optimism around U.S.-China trade talks in the upcoming G20 summit boosted oil prices significantly. In such a scenario, investing in energy mutual funds seems prudent.

Oil Prices Jump on Rising US-Iran Tension

Oil prices climbed on Jun 20 after an Iranian surface-to-air missile shot down a U.S. military surveillance drone above the Strait of Hormuz. According to a CNBC report, while U.S. officials said the drone was in international airspace, Iran claimed it was over Iranian territory.

On Jun 20, the U.S. West Texas Intermediate (WTI) rose $2.89, or 5.4%, to settle at $56.65, marking the biggest daily gain since December.  The global benchmark Brent crude surged 4.5% to settle at $64.61 a barrel, the highest since May 31 and biggest one-day jump since Jan 9.

This incident comes amid ongoing tensions between the United States and the middle-eastern country, which largely arises from U.S. sanctions aimed at reducing Iranian oil exports to zero level. Recent incidents such as the United States blaming Iran of attacking oil tankers in the Gulf of Oman have also put the two countries in a precarious situation. 

This tense situation in the Middle East could drive oil prices higher in the coming weeks. This is because one-fifth of the world’s oil output comes from the region and the Strait of Hormuz, which is a crucial waterway for the free passage of oil.

Likely Fed Rate Cut, U.S.-China Trade Talks Could Push Oil

Federal Reserve’s signal of a rate cut and U.S.-China’s upcoming trade talks during the G20 summit also helped oil prices move north.

Federal Reserve Chairman Jerome Powell signaled earlier this week that the central bank may cut benchmark interest rates in the weeks ahead if the economic outlook resulting from U.S.-China trade tensions doesn’t improve. The rates are in a range of 2.25-2.50% at present. A rate cut would boost growth in the United States, which could lead to higher energy consumption.

Also, the fact that President Donald Trump and his Chinese counterpart are set to discuss trade issues extensively in Japan next month, raises optimism around the prospect of a favorable trade deal. This could boost oil prices as well.

OPEC+ Could Keep Output Cuts Intact

Finally, the OPEC and its allies, which produce more than 50% of crude worldwide, have finally concluded on a date for their next meeting. The oil-producing countries will meet in Vienna on July 1-2 to discuss if their output curbs will be extended till the end of 2019.

An extended production cut would reduce inventories at the rate of about 500,000 barrels a day in the latter half of the year, which could further push oil prices higher.    

Our Choices

As oil prices are widely expected to move higher in the coming weeks, it makes sense to invest in mutual funds that greatly invest in energy companies. We have selected four such funds that you could consider adding to your portfolio.

All these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging year-to-date returns. Additionally, the minimum initial investment is less than $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Now we come to the second-most vital question: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Invesco Oppenheimer SteelPath MLP Select 40 Fund Class Y (MLPTX Quick QuoteMLPTX - Free Report) aims for total return. The fund invests at least 80% of its assets in master limited partnership investments of issuers in the transportation, storage, processing, refining, marketing, exploration, production and mining of natural resources and minerals. The fund also invests in derivatives and other instruments whose economic characteristics are similar to such securities.

This Zacks sector – Energy product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

MLPTX carries a Zacks Mutual Fund Rank #1. The fundhas an annual expense ratio of 0.87%, which is below the category average of 1.76%. It has year-to-date returns of 10.5%.The fund has no minimum initial investment.

Advisory Research MLP & Energy Income A (INFRX Quick QuoteINFRX - Free Report) fund aims for current income. The fund invests the majority of its assets in equity and debt securities of master limited partnerships that mostly focus in the energy infrastructure sector. The non-diversified fund also invests in equity and debt securities of other organizations in the energy infrastructure sector.

This Zacks sector – Energy product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

INFRX carries a Zacks Mutual Fund Rank #1. The fundhas an annual expense ratio of 1.41%, which is below the category average of 1.76%. It has year-to-date returns of 13%.The fund has minimum initial investment of $2500.

Putnam Global Natural Resources Y fund seeks growth of capital. The fund primarily invests in common stocks of large- and medium-capitalization companies that the manager believes have good investment potential. The non-diversified fund invests most of its assets in securities of companies in energy or other natural resources industries.

This Zacks sector – Energy product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PGRYX carries a Zacks Mutual Fund Rank #2. The fundhas an annual expense ratio of 1.05%, which is below the category average of 1.33%. It has year-to-date returns of 4.9%.The fund has no minimum initial investment.

Vanguard Energy Fund Investor Shares (VGENX Quick QuoteVGENX - Free Report) aims for long-term capital growth. The fund invests most of its assets in common stocks of companies that are engaged in activities in the energy sector. These activities range from exploration, production, and transmission of energy or energy fuels to the making and servicing of component products, energy research and energy conservation etc.

This Zacks sector – Energy product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VGENX carries a Zacks Mutual Fund Rank #2. The fundhas an annual expense ratio of 0.37%, which is below the category average of 1.40%. It has year-to-date returns of 5.7%.The fund has minimum initial investment of $3000.

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