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Oil price topped above $90 per barrel for the first time since 2014 on supply disruptions and unprecedented demand. The geopolitical tensions between Russia and Ukraine and in the Middle East as well as frigid weather heightened concerns over tight energy supply amid increasing demand.
The supply side of the energy market remains tight as the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, stuck to their planned output increase of 400,000 barrels per day in February rather than boosting it further. Ebbing concerns over the Omicron variant and rising jet fuel consumption are bolstering the demand. Increasing COVID-19 vaccination rates, loosening pandemic-related restrictions, and a growing economy should continue to support the demand for energy. The combination of factors is expected to continue pushing oil prices higher and thus the energy sector.
Added to the strong momentum is the state of backwardation in the oil futures market, where later-dated contracts are cheaper than near-term 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 (read: Oil in Backwardation: 7 ETFs That Topped the Chart Last Week).
Further, a slew of Wall Street banks and oil executives are forecasting a return to $100 oil.
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.
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 (read: 3 Oil ETFs to Ride the Crude Rally).
Given this, we have highlighted ETFs that are expected to benefit/lose from higher oil price:
VanEck Oil Services ETF 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. It holds 25 stocks in its basket with a double-digit allocation each in the top two firms (read: Best-Performing Stocks of the Top ETF of January).
With AUM of $2.7 billion, VanEck Vectors Oil Services ETF charges 35 bps in annual fees and trades in an average daily volume of 937,000 shares. 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)
SPDR S&P Oil & Gas Exploration & Production ETF provides exposure to 59 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It is widely spread out across components, with each accounting less than 3% share.
SPDR S&P Oil & Gas Exploration & Production ETF has accumulated $4.4 billion in its base and trades in an average daily volume of 7.4 million shares. The ETF charges 35 bps in fees per year and has a Zacks ETF Rank #3 with a High risk outlook.
VanEck Russia ETF
VanEck Russia ETF 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.
VanEck Russia ETF is popular and liquid with AUM of $1.3 billion and trades in an average daily volume of 7.2 million shares. It has a Zacks ETF Rank #3 with a High risk outlook.
U.S. Global Jets ETF provides pure-play 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 51 securities.
U.S. Global Jets ETF has gathered $3.6 million in its asset base while charging investors 60 bps in annual fees. It trades in an average daily volume of 12.8 million shares and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Profit From Higher Oil Price With These Leveraged ETFs).
SPDR S&P Retail ETF tracks the S&P Retail Select Industry Index, which provides exposure across large, mid-and small-cap retail stocks. It holds well-diversified 109 stocks in its basket. SPDR S&P Retail ETF is well spread across various industries with a double-digit allocation each in apparel retail, Internet & direct marketing retail, automotive retail and specialty stores.
SPDR S&P Retail ETF is the largest and most popular in the retail space with AUM of $382.4 million and an average trading volume of 4.5 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy).
iShares India 50 ETF provides exposure to the largest Indian stocks by tracking the Nifty 50 Index. It holds 51 stocks in its basket with none accounting for more than 10.5% of assets. iShares India 50 ETF has key holdings in financials, information technology and energy.
iShares India 50 ETF has managed assets worth $692.6 million and is a high-cost choice in the space, charging 90 bps in annual fees. INDY trades in an average daily volume of 67,000 shares and has a Zacks ETF Rank #3 with a Medium risk outlook.
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ETFs to Gain & Lose From Higher Oil Price
Oil price topped above $90 per barrel for the first time since 2014 on supply disruptions and unprecedented demand. The geopolitical tensions between Russia and Ukraine and in the Middle East as well as frigid weather heightened concerns over tight energy supply amid increasing demand.
The supply side of the energy market remains tight as the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, stuck to their planned output increase of 400,000 barrels per day in February rather than boosting it further. Ebbing concerns over the Omicron variant and rising jet fuel consumption are bolstering the demand. Increasing COVID-19 vaccination rates, loosening pandemic-related restrictions, and a growing economy should continue to support the demand for energy. The combination of factors is expected to continue pushing oil prices higher and thus the energy sector.
Added to the strong momentum is the state of backwardation in the oil futures market, where later-dated contracts are cheaper than near-term 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 (read: Oil in Backwardation: 7 ETFs That Topped the Chart Last Week).
Further, a slew of Wall Street banks and oil executives are forecasting a return to $100 oil.
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.
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 (read: 3 Oil ETFs to Ride the Crude Rally).
Given this, we have highlighted ETFs that are expected to benefit/lose from higher oil price:
ETFs to Gain
VanEck Oil Services ETF (OIH - Free Report)
VanEck Oil Services ETF 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. It holds 25 stocks in its basket with a double-digit allocation each in the top two firms (read: Best-Performing Stocks of the Top ETF of January).
With AUM of $2.7 billion, VanEck Vectors Oil Services ETF charges 35 bps in annual fees and trades in an average daily volume of 937,000 shares. 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)
SPDR S&P Oil & Gas Exploration & Production ETF provides exposure to 59 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It is widely spread out across components, with each accounting less than 3% share.
SPDR S&P Oil & Gas Exploration & Production ETF has accumulated $4.4 billion in its base and trades in an average daily volume of 7.4 million shares. The ETF charges 35 bps in fees per year and has a Zacks ETF Rank #3 with a High risk outlook.
VanEck Russia ETF
VanEck Russia ETF 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.
VanEck Russia ETF is popular and liquid with AUM of $1.3 billion and trades in an average daily volume of 7.2 million shares. It has a Zacks ETF Rank #3 with a High risk outlook.
ETFs to Lose
U.S. Global Jets ETF (JETS - Free Report)
U.S. Global Jets ETF provides pure-play 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 51 securities.
U.S. Global Jets ETF has gathered $3.6 million in its asset base while charging investors 60 bps in annual fees. It trades in an average daily volume of 12.8 million shares and has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Profit From Higher Oil Price With These Leveraged ETFs).
SPDR S&P Retail ETF (XRT - Free Report)
SPDR S&P Retail ETF tracks the S&P Retail Select Industry Index, which provides exposure across large, mid-and small-cap retail stocks. It holds well-diversified 109 stocks in its basket. SPDR S&P Retail ETF is well spread across various industries with a double-digit allocation each in apparel retail, Internet & direct marketing retail, automotive retail and specialty stores.
SPDR S&P Retail ETF is the largest and most popular in the retail space with AUM of $382.4 million and an average trading volume of 4.5 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy).
iShares India 50 ETF (INDY - Free Report)
iShares India 50 ETF provides exposure to the largest Indian stocks by tracking the Nifty 50 Index. It holds 51 stocks in its basket with none accounting for more than 10.5% of assets. iShares India 50 ETF has key holdings in financials, information technology and energy.
iShares India 50 ETF has managed assets worth $692.6 million and is a high-cost choice in the space, charging 90 bps in annual fees. INDY trades in an average daily volume of 67,000 shares and has a Zacks ETF Rank #3 with a Medium risk outlook.