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What Lies Ahead for Oil & Energy ETFs in the Medium Term?

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Oil investing is at a critical juncture right now. While there is optimism in the space due to China’s economic recovery, the latest global banking crisis and the resultant recessionary fears are posing as threats. Though traders are cautiously optimistic about the oil demand for the second half of the year, prices are likely to remain largely range-bound in the short term. Notably, oil prices slumped to the lowest level since December 2021.

Let’s find out what awaits in the oil and energy ETF investing space.

Global Banking Crisis

Rising rates globally have weighed on the regional banking system that acted as the lifeline for the tech and biotech start-ups. As a result, Silicon Valley Bank, Signature Bank and Silvergate Bank failed last week in the United States. The crisis sent shockwaves through the global banking market. 

Meanwhile, Credit Suisse Group AG said this week that it intended to borrow up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank in what it called "decisive action" to shore up its liquidity, after the former’s biggest backer ruled out monetary support.

The move came after Swiss regulators vowed to offer liquidity support to Credit Suisse in an unprecedented move by a central bank after the flagship Swiss lender's shares nosedived by as much as 30% on Wednesday on fears of a debt default.

If this was not enough, JPMorgan, Citi, Goldman Sachs, other banks inject $30 billion to rescue another U.S. bank – First Republic Bank (FRC) – to arrest another collapse in the U.S. regional baking system.

Global Slowdown Fear to Put Pressure on Oil Market in Near Term

Goldman Sachs cut its growth forecast by 0.3 percentage points to 1.2% for 2023 due to struggling small banks, which are the key to the U.S. economy, as quoted on CNBC. Goes without saying, the ripple effects of the banking crisis will likely weigh on global growth.

Investors should note that larger-than-expected U.S. fuel inventory buildup in recent months and expectations of weaker global growth have resulted in lower energy prices. But as drilling activity slows in response to the moderation in oil prices, the reduced production will threaten supplies in the future, Saudi Aramco CEO Amin Nasser said, as quoted on CNBC.

Prolonged Underinvestment Likely to Save Oil Prices in Medium Term 

Continued underinvestment in the oil sector will keep global supply tight, per CEO of Aramco, the world’s largest oil company. Spending on the sector is $370 billion to $400 billion, currently in the upstream side, while it was approximately $700 billion in 2014,” Nasser said in a CNBC article.  He indicated that China reopening could infuse 2 million barrels more demand.

According to oil services company Baker Hughes, the active rig count in the United States dropped from a recent high of 627 in early December to 600 in late February. The number of rigs in use as of the end of February is at its lowest since early July 2022, the company reported.

Tight OPEC Supply Are Likely in the Cards

Organization of Petroleum Exporting Countries (OPEC)’s crude output dropped in January but rose in February as Nigeria recoiled production. The group has pumped 28.97 million barrels per day (bpd) this month, the survey found, up 50,000 bpd from January. Output is still down more than 700,000 bpd from September. 

Big Oil Buyback & Dividends to Diminish Ahead?

An article hinted that debt-laden pipeline companies may not hike dividend payments in a high-interest rate environment. Though energy companies’ profits and cash flows came in at record high in 2022, interest costs may increase faster than cash flow in the coming days. This may chop off energy companies’ sizable dividends and buybacks in the medium term.

Oil Price Projections

According to the short-term energy outlook (STEO), the EIA sees the Brent spot average coming in at $82.95 per barrel in 2023 and $77.57 per barrel in 2024. In its previous STEO, which was released in January, the EIA projected that the Brent spot price would average $83.10 per barrel in 2023 and $77.57 per barrel in 2024.

Against this backdrop, below, we highlight a few energy ETFs that investors should keep track of.

ETFs in Focus

VanEck Oil Refiners ETF (CRAK - Free Report)

SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report)

Invesco Dynamic Oil & Gas Services ETF (PXJ - Free Report)

iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report)

VanEck Oil Services ETF (OIH - Free Report)

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