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Oil made the greatest comeback in history after plunging into negative territory in April. U.S. crude returned to $40 per barrel for the first time in three months. The positive trend is likely to continue driven by improving demand and supply dynamics.
Oil producers have started scaling back their production at record levels. The most notable development comes from OPEC, the 14-nation organization, and its allies that have agreed to extend historic production cuts of 9 .7 million barrels per day (about 10% of global supply) by another month through the end of July (read: Crude Saw Best Month Ever: Are Energy ETFs Ready to Jump?).
Additionally, Saudi Arabia has pledged to reduce its output by an additional one million barrels per day starting June. UAE and Kuwait have announced additional cuts of 1.18 million barrels per day in June. Production has dropped to 11.4 million barrels per day in the United States from March’s record of 13.1 million barrels. Norway and Canada are among the other nations that have scaled back output.
Further, the stockpile is declining slowly, easing a storage crisis. The International Energy Agency (IEA) forecasts lower global stockpiles in the second half of 2020, even as worries remain over a second surge in coronavirus infections in the coming months. It expects crude inventories to fall by about 5.5 million barrels per day in the second half of this year. The number of rigs drilling crude oil in the United States also decreased by 16 to 206 last week, the lowest since 2009.
As countries across the world are easing restrictions, demand for oil has gathered steam. Most notably, oil demand in China, the second-largest market in the world accounting for 15% of the world’s oil demand, is returning to pre-pandemic levels. The upbeat U.S. job report boosted demand for crude. For 2020, the IEA now expects global crude demand to fall by 8.6 million barrels a day versus its April forecast of a decline of 9.3 million barrels.
Higher Oil Price: A Boon or Bane?
Higher oil price is a boon to energy stocks, especially producers and explorers, who derive most of their revenues from selling the crude that they extract. This is because the cost of oil production or extraction remains low as companies look to lock in supply contracts at higher prices. The gap between production cost and selling price keeps on rising when oil price surges, leading to fat profit margins and higher share price. The oil producing nations thus also get a boost.
While almost every corner of the energy segment is shining, oil refiners might be hit hard. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, higher oil prices crimp margins for refiners, leading to weak stock prices.
Further, higher oil price increases gasoline and jet prices. The resultant inflationary pressure will raise the price of products, leading to reduced consumer spending, which accounts for more than two-thirds of U.S. economic activity. The discretionary and retail sectors will thus bear the brunt.
Apart from these, higher oil price is a major threat to oil-consuming nations like India, Turkey and South Africa. After all, higher oil prices restrict tax revenues or GDP growth opportunities in big oil-importing countries. This is because imports become more expensive and exports less valuable. This leads to deterioration in balance of payments, lower output, and increase in inflation and unemployment rate, thereby thwarting overall economic growth in these countries.
Given this, we have highlighted ETFs that are expected to benefit/lose from higher oil price:
This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $625.5 million, it holds 24 stocks in its basket and charges 35 bps in annual fees. The product has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 5 Energy ETFs Look Solid on Rank Upgrade, Oil Price Rise).
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This fund provides exposure to oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $2.5 billion and holds 56 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.
VanEck Vectors Russia ETF
This product offers exposure to 27 publicly traded companies that are incorporated in Russia or outside but have at least 50% of their revenues/related assets in Russia. It follows the MVIS Russia Index, charging investors 67 bps in annual fees. RSX is popular and liquid with AUM of $1 billion and has a Zacks ETF Rank #3 with a High risk outlook.
This pure-play ETF provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product holds 40 securities. The fund has gathered $1.6 billion in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #4 with a High risk outlook (read: Airline ETF Flying With Billion Dollars in AUM).
With AUM of $24.2 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, holding 25 stocks. The product charges 60 bps in annual fees.
XRT targets the retail sector and tracks the S&P Retail Select Industry Index. It is home to 87 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $337.3 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
This ETF provides exposure to the largest 51 Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $531.1 million and is a high-cost choice in the space, charging 94 bps in annual fees. INDY has a Zacks ETF Rank #3 with a Medium risk outlook.
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Oil Back to $40 Level: ETFs to Gain or Lose
Oil made the greatest comeback in history after plunging into negative territory in April. U.S. crude returned to $40 per barrel for the first time in three months. The positive trend is likely to continue driven by improving demand and supply dynamics.
Oil producers have started scaling back their production at record levels. The most notable development comes from OPEC, the 14-nation organization, and its allies that have agreed to extend historic production cuts of 9 .7 million barrels per day (about 10% of global supply) by another month through the end of July (read: Crude Saw Best Month Ever: Are Energy ETFs Ready to Jump?).
Additionally, Saudi Arabia has pledged to reduce its output by an additional one million barrels per day starting June. UAE and Kuwait have announced additional cuts of 1.18 million barrels per day in June. Production has dropped to 11.4 million barrels per day in the United States from March’s record of 13.1 million barrels. Norway and Canada are among the other nations that have scaled back output.
Further, the stockpile is declining slowly, easing a storage crisis. The International Energy Agency (IEA) forecasts lower global stockpiles in the second half of 2020, even as worries remain over a second surge in coronavirus infections in the coming months. It expects crude inventories to fall by about 5.5 million barrels per day in the second half of this year. The number of rigs drilling crude oil in the United States also decreased by 16 to 206 last week, the lowest since 2009.
As countries across the world are easing restrictions, demand for oil has gathered steam. Most notably, oil demand in China, the second-largest market in the world accounting for 15% of the world’s oil demand, is returning to pre-pandemic levels. The upbeat U.S. job report boosted demand for crude. For 2020, the IEA now expects global crude demand to fall by 8.6 million barrels a day versus its April forecast of a decline of 9.3 million barrels.
Higher Oil Price: A Boon or Bane?
Higher oil price is a boon to energy stocks, especially producers and explorers, who derive most of their revenues from selling the crude that they extract. This is because the cost of oil production or extraction remains low as companies look to lock in supply contracts at higher prices. The gap between production cost and selling price keeps on rising when oil price surges, leading to fat profit margins and higher share price. The oil producing nations thus also get a boost.
While almost every corner of the energy segment is shining, oil refiners might be hit hard. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, higher oil prices crimp margins for refiners, leading to weak stock prices.
Further, higher oil price increases gasoline and jet prices. The resultant inflationary pressure will raise the price of products, leading to reduced consumer spending, which accounts for more than two-thirds of U.S. economic activity. The discretionary and retail sectors will thus bear the brunt.
Apart from these, higher oil price is a major threat to oil-consuming nations like India, Turkey and South Africa. After all, higher oil prices restrict tax revenues or GDP growth opportunities in big oil-importing countries. This is because imports become more expensive and exports less valuable. This leads to deterioration in balance of payments, lower output, and increase in inflation and unemployment rate, thereby thwarting overall economic growth in these countries.
Given this, we have highlighted ETFs that are expected to benefit/lose from higher oil price:
ETFs to Gain
VanEck Vectors Oil Services ETF ((OIH - Free Report)
This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $625.5 million, it holds 24 stocks in its basket and charges 35 bps in annual fees. The product has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: 5 Energy ETFs Look Solid on Rank Upgrade, Oil Price Rise).
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This fund provides exposure to oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $2.5 billion and holds 56 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.
VanEck Vectors Russia ETF
This product offers exposure to 27 publicly traded companies that are incorporated in Russia or outside but have at least 50% of their revenues/related assets in Russia. It follows the MVIS Russia Index, charging investors 67 bps in annual fees. RSX is popular and liquid with AUM of $1 billion and has a Zacks ETF Rank #3 with a High risk outlook.
ETFs to Lose
U.S. Global Jets ETF (JETS - Free Report)
This pure-play ETF provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product holds 40 securities. The fund has gathered $1.6 billion in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #4 with a High risk outlook (read: Airline ETF Flying With Billion Dollars in AUM).
VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
With AUM of $24.2 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, holding 25 stocks. The product charges 60 bps in annual fees.
SPDR S&P Retail ETF (XRT - Free Report)
XRT targets the retail sector and tracks the S&P Retail Select Industry Index. It is home to 87 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $337.3 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares India 50 ETF (INDY - Free Report)
This ETF provides exposure to the largest 51 Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $531.1 million and is a high-cost choice in the space, charging 94 bps in annual fees. INDY has a Zacks ETF Rank #3 with a Medium risk outlook.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>