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Oil price has been on the rise in recent weeks with Brent oil hovering near its highest level since October 2018 and WTI crude near the highest since the start of August 2020. Tightening supply and improving demand fundamentals have been driving the prices higher
This is especially true as production remained hampered in the Gulf of Mexico after two hurricanes and U.S. crude stockpiles dropped to the lowest level since October 2018. Almost 16% of the Gulf of Mexico oil production is still offline after the impact of two hurricanes. The Bureau of Safety and Environmental Enforcement’s data showed that 294,000 barrels a day or about one-sixth of total Gulf output are still offline on Sep 22, more than two weeks after Hurricane Ida swept through the region.
Additionally, some members of the Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, are struggling to raise the output following under-investment or delays to maintenance work due to COVID-19.
Added to the strength is growing fuel demand. Overall demand for fuel has rebounded to pre-pandemic levels. With new vaccination mandates to control the rising Delta variant of COVID-19, demand is poised to increase. OPEC+ in its latest monthly report forecasts oil demand to grow by 4.15 million barrels per day in 2022, up from the previous forecast of 3.28 million barrels per day. It also expects demand to reach 100.83 million barrels per day for the year, driven by a stronger-than-expected recovery in fuel demand and a steady economic outlook in all regions.
The OPEC monthly report further states that the world will continue to face a supply deficit in the coming months even as OPEC nations revive idle production.
Higher Oil Price: A Boon or Bane?
Higher oil prices are 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 thus pushes up a company’s share price. The oil-producing nations also get a boost.
While almost every corner of the energy segment is shining, oil refiners might be hit. 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 prices increase 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: Sector ETFs to Benefit/Lose as Oil Crosses $70).
Apart from these, a 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 turn less valuable. It will lead to deterioration in the balance of payments, lower output, and an increase in inflation and unemployment rate in these countries, thereby thwarting overall economic growth.
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 $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.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This fund provides exposure to 55 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $3.3 billion in its base and trades in an average daily volume of 7 million shares. The ETF charges 35 bps in fees per year and has a Zacks ETF Rank #3 with a High risk outlook (read: Energy ETFs: A Bright Spot Amid Volatility).
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 $1.5 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 53 securities. The fund has gathered $3.3 million 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: Travel & Tourism ETFs to Gain on Easing U.S. Travel Restriction).
With AUM of $20.2 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 59 bps in annual fees.
XRT targets the retail sector and tracks the S&P Retail Select Industry Index. It is home to 108 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $1.1 billion and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Buy the Dip With These Top-Ranked ETFs).
This ETF provides exposure to the largest 51 Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $737.9 million and is a high-cost choice in the space, charging 90 bps in annual fees. INDY has a Zacks ETF Rank #3 with a Medium risk outlook (read: India ETFs at a 52-Week High: Here's Why).
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ETFs to Win & Lose From Higher Oil Price
Oil price has been on the rise in recent weeks with Brent oil hovering near its highest level since October 2018 and WTI crude near the highest since the start of August 2020. Tightening supply and improving demand fundamentals have been driving the prices higher
This is especially true as production remained hampered in the Gulf of Mexico after two hurricanes and U.S. crude stockpiles dropped to the lowest level since October 2018. Almost 16% of the Gulf of Mexico oil production is still offline after the impact of two hurricanes. The Bureau of Safety and Environmental Enforcement’s data showed that 294,000 barrels a day or about one-sixth of total Gulf output are still offline on Sep 22, more than two weeks after Hurricane Ida swept through the region.
Additionally, some members of the Organization of the Petroleum Exporting Countries (OPEC) and allies, known as OPEC+, are struggling to raise the output following under-investment or delays to maintenance work due to COVID-19.
Added to the strength is growing fuel demand. Overall demand for fuel has rebounded to pre-pandemic levels. With new vaccination mandates to control the rising Delta variant of COVID-19, demand is poised to increase. OPEC+ in its latest monthly report forecasts oil demand to grow by 4.15 million barrels per day in 2022, up from the previous forecast of 3.28 million barrels per day. It also expects demand to reach 100.83 million barrels per day for the year, driven by a stronger-than-expected recovery in fuel demand and a steady economic outlook in all regions.
The OPEC monthly report further states that the world will continue to face a supply deficit in the coming months even as OPEC nations revive idle production.
Higher Oil Price: A Boon or Bane?
Higher oil prices are 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 thus pushes up a company’s share price. The oil-producing nations also get a boost.
While almost every corner of the energy segment is shining, oil refiners might be hit. 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 prices increase 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: Sector ETFs to Benefit/Lose as Oil Crosses $70).
Apart from these, a 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 turn less valuable. It will lead to deterioration in the balance of payments, lower output, and an increase in inflation and unemployment rate in these countries, thereby thwarting overall economic growth.
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 $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.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This fund provides exposure to 55 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $3.3 billion in its base and trades in an average daily volume of 7 million shares. The ETF charges 35 bps in fees per year and has a Zacks ETF Rank #3 with a High risk outlook (read: Energy ETFs: A Bright Spot Amid Volatility).
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 $1.5 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 53 securities. The fund has gathered $3.3 million 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: Travel & Tourism ETFs to Gain on Easing U.S. Travel Restriction).
VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
With AUM of $20.2 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 59 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 108 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $1.1 billion and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Buy the Dip With These Top-Ranked ETFs).
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 $737.9 million and is a high-cost choice in the space, charging 90 bps in annual fees. INDY has a Zacks ETF Rank #3 with a Medium risk outlook (read: India ETFs at a 52-Week High: Here's Why).