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Oil price is riding high on optimism over rising demand for jet fuel during the summer driving season of the United States, the world's top oil consumer. Notably, Brent topped $71 per barrel — the highest since March.
This is especially true, as gasoline consumption increased in the Memorial Day weekend. According to GasBuddy, U.S. gasoline demand jumped 9.6% on May 30, above the average of the previous four Sundays. This was also the highest Sunday demand since summer 2019. Average retail prices for regular gasoline in the United States rose to $3.046 per gallon on May 30, the highest since October 2014, according to auto club AAA (read: A Pure-Play Gasoline ETF to Profit From as Gas Price Tops $3).
Additionally, speedy economic growth in the United States and Europe is leading to higher demand for energy. The Organization of the Petroleum Exporting Countries (OPEC) and its allies are expected to continue to slowly ease supply curbs at a meeting slated today. In the April meeting, they agreed to return 2.1 million barrels per day (bpd) of supply to the market from May to July.
Market participants expect the recovery in global demand to absorb this additional supply despite the prospect of more output from Iran should a nuclear deal be revived and concerns over tighter COVID-19 related restrictions across parts of Asia. Inventories are also declining with the oil glut created during the pandemic almost used up. Now, the stockpiles are expected to decline rapidly in the second half of the year. OPEC expects stockpiles to decline by at least 2 million barrels a day from September through December.
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. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to prevail 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: 3 ETFs to Protect Against Inflation).
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 a 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 and 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 $2.2 billion, it holds 25 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 Sector ETFs That Gained Double-Digits Last Week).
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 $3.9 billion and holds 50 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.
VanEck Vectors Russia ETF
This product offers exposure to 29 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 61 bps in annual fees. RSX is popular and liquid with AUM of $1.8 billion and has a Zacks ETF Rank #3 with a High risk outlook (read: Commodity Prices on an Unstoppable Rally: ETFs to Benefit).
With AUM of $21.4 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 59 bps in annual fees.
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 $3.9 billion in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #2 with a High risk outlook.
XRT targets the retail sector and tracks the S&P Retail Select Industry Index. It is home to 101 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $758.4 million and has a Zacks ETF Rank #2 with a Medium risk outlook (read: Retail ETFs in Focus Post Q1 Earnings).
This ETF provides exposure to the 52 largest Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $673.7 million and is a high-cost choice in the space, charging 93 bps in annual fees. INDY has a Zacks ETF Rank #5 (Strong Sell) with a Medium risk outlook.
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Brent Tops $70 Again: ETFs Set to Win & Lose
Oil price is riding high on optimism over rising demand for jet fuel during the summer driving season of the United States, the world's top oil consumer. Notably, Brent topped $71 per barrel — the highest since March.
This is especially true, as gasoline consumption increased in the Memorial Day weekend. According to GasBuddy, U.S. gasoline demand jumped 9.6% on May 30, above the average of the previous four Sundays. This was also the highest Sunday demand since summer 2019. Average retail prices for regular gasoline in the United States rose to $3.046 per gallon on May 30, the highest since October 2014, according to auto club AAA (read: A Pure-Play Gasoline ETF to Profit From as Gas Price Tops $3).
Additionally, speedy economic growth in the United States and Europe is leading to higher demand for energy. The Organization of the Petroleum Exporting Countries (OPEC) and its allies are expected to continue to slowly ease supply curbs at a meeting slated today. In the April meeting, they agreed to return 2.1 million barrels per day (bpd) of supply to the market from May to July.
Market participants expect the recovery in global demand to absorb this additional supply despite the prospect of more output from Iran should a nuclear deal be revived and concerns over tighter COVID-19 related restrictions across parts of Asia. Inventories are also declining with the oil glut created during the pandemic almost used up. Now, the stockpiles are expected to decline rapidly in the second half of the year. OPEC expects stockpiles to decline by at least 2 million barrels a day from September through December.
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. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to prevail 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: 3 ETFs to Protect Against Inflation).
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 a 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 and lose from higher oil price:
ETFs to Win
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 $2.2 billion, it holds 25 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 Sector ETFs That Gained Double-Digits Last Week).
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 $3.9 billion and holds 50 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.
VanEck Vectors Russia ETF
This product offers exposure to 29 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 61 bps in annual fees. RSX is popular and liquid with AUM of $1.8 billion and has a Zacks ETF Rank #3 with a High risk outlook (read: Commodity Prices on an Unstoppable Rally: ETFs to Benefit).
ETFs to Lose
VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
With AUM of $21.4 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 59 bps in annual fees.
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 $3.9 billion in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #2 with a High risk outlook.
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 101 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $758.4 million and has a Zacks ETF Rank #2 with a Medium risk outlook (read: Retail ETFs in Focus Post Q1 Earnings).
iShares India 50 ETF (INDY - Free Report)
This ETF provides exposure to the 52 largest Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $673.7 million and is a high-cost choice in the space, charging 93 bps in annual fees. INDY has a Zacks ETF Rank #5 (Strong Sell) 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 >>