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Oil price has been on a surge in recent months buoyed by solid development on the COVID-19 vaccine front. The rollout of COVID-19 vaccines soon after encouraging trial results from Moderna (MRNA - Free Report) , Pfizer (PFE - Free Report) and AstraZeneca (AZN - Free Report) has raised the expectation of a faster-than-expected recovery in energy demand. Notably, Brent touched $50 per barrel for the first time since early March.
Britain began Pfizer’s vaccinations last week while Canada plans to roll out vaccination this week after being approved. The FDA also authorized Pfizer's vaccine for emergency use in people aged 16 and older. Additionally, a tanker explosion at the Saudi Arabian port of Jeddah has sparked oil supply jitters, providing a boost to the price.
Reports showing Chinese demand exceeding pre-COVID levels and an uptick in Chinese refinery runs also led to a spike in oil price. A weak dollar has been supporting oil price as it makes the dollar-denominated commodity less expensive for foreign buyers.
Further, the OPEC and its allies reached a fresh deal to curb oil output in January. Though the cartel will cut about 7.2 million barrels per day next month, it is lower than the current 7.7 million barrel per day cuts (read: 5 Energy ETFs Making the Most of the Oil Rally).
Apart from these, the energy market has been benefiting from the positive roll yield in the futures market. This is because the oil market is currently in a state of backwardation, where later-dated contracts are cheaper than near-term contracts, for months. Per CME Group data, Brent futures for March delivery were trading about 13 cents below February contracts. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity.
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 may 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 (read: 8 ETFs That Have Gained More Than 100% in 2020).
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 $662.2 million, it holds 25 stocks in its basket and charges 35 bps in annual fees. The product has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: 5 Energy ETFs Making the Most of the Oil Rally).
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 $2.1 billion and holds 56 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3 (Hold) 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 $1.4 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 $2.9 billion in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #3 with a High risk outlook (read: 5 Sector ETFs Still At Cheap Prices Amid Peak Market).
With AUM of $17.3 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 84 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $581.2 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: After a Historic November, What Awaits ETFs in December?).
This ETF provides exposure to the largest 51 Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $623.9 million and is a high-cost choice in the space, charging 93 bps in annual fees. INDY has a Zacks ETF Rank #3 with a Medium risk outlook.
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ETFs to Win & Lose From the Surge in Oil Price
Oil price has been on a surge in recent months buoyed by solid development on the COVID-19 vaccine front. The rollout of COVID-19 vaccines soon after encouraging trial results from Moderna (MRNA - Free Report) , Pfizer (PFE - Free Report) and AstraZeneca (AZN - Free Report) has raised the expectation of a faster-than-expected recovery in energy demand. Notably, Brent touched $50 per barrel for the first time since early March.
Britain began Pfizer’s vaccinations last week while Canada plans to roll out vaccination this week after being approved. The FDA also authorized Pfizer's vaccine for emergency use in people aged 16 and older. Additionally, a tanker explosion at the Saudi Arabian port of Jeddah has sparked oil supply jitters, providing a boost to the price.
Reports showing Chinese demand exceeding pre-COVID levels and an uptick in Chinese refinery runs also led to a spike in oil price. A weak dollar has been supporting oil price as it makes the dollar-denominated commodity less expensive for foreign buyers.
Further, the OPEC and its allies reached a fresh deal to curb oil output in January. Though the cartel will cut about 7.2 million barrels per day next month, it is lower than the current 7.7 million barrel per day cuts (read: 5 Energy ETFs Making the Most of the Oil Rally).
Apart from these, the energy market has been benefiting from the positive roll yield in the futures market. This is because the oil market is currently in a state of backwardation, where later-dated contracts are cheaper than near-term contracts, for months. Per CME Group data, Brent futures for March delivery were trading about 13 cents below February contracts. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity.
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 may 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 (read: 8 ETFs That Have Gained More Than 100% in 2020).
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 $662.2 million, it holds 25 stocks in its basket and charges 35 bps in annual fees. The product has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: 5 Energy ETFs Making the Most of the Oil Rally).
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 $2.1 billion and holds 56 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3 (Hold) 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 $1.4 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 $2.9 billion in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #3 with a High risk outlook (read: 5 Sector ETFs Still At Cheap Prices Amid Peak Market).
VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
With AUM of $17.3 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 84 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $581.2 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: After a Historic November, What Awaits ETFs in December?).
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 $623.9 million and is a high-cost choice in the space, charging 93 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 >>