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Sector ETFs to Benefit/Lose on Surprise OPEC+ Output Cut
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Oil prices increased considerably (i.e., by about 8%) on Apr 3 as OPEC+ producers agreed a surprise oil output cut on Sunday. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, decided to cut production targets by about 1.16 million barrels per day from May. The cut will run until the end of 2023.
The output cut is in addition to the 2 million barrels per day cut announced last October by the oil cartel. Per Reuters, the latest announcement brings the total output reduction to 3.66 million barrels per day (bpd), which roughly equals to 3.7% of the global demand.
The move also came on the back of Russia’s decision to trim oil production by 500,000 barrels per day until the end of 2023, according to the country’s Deputy Prime Minister Alexander Novak. The head of investment firm Pickering Energy Partners expect this oil production cut to boost prices by $10 per barrel, as quoted on Reuters.
Apart from the OPEC+ production cut, the recovery of global oil demand from China reopening is also helping the oil demand and prices. Per CNBC, about 38.5% of global oil demand recovery is likely to come from China.
Oil to Hit $100 Per Barrel Soon?
“OPEC+‘s plan for a further production cut may push oil prices toward the $100 mark again, considering China’s reopening and Russia’s output cuts as a retaliation move against western sanctions,” CMC Markets’ analyst Tina Teng told CNBC. In March, oil prices nosedived to their lowest since December 2021, as the banking rout was thought to be weighing on global economic growth and oil demand.
However, with the backing crisis having been managed efficiently and timely and the OPEC+ continuing output cuts, we can expect a meaningful rally in oil prices in the near term. Against this backdrop, it would be prudent to discuss ETF areas that tend to gain on rising crude prices as well as the ones that are likely to underperform.
Gainers
Energy – Energy Select Sector SPDR Fund (XLE - Free Report)
This is the most obvious choice. If oil price is staging an uptrend on reduced supplies, oil exploration and production stocks are sure to benefit as these companies will have a chance to pump more oil over the medium term. Plus, the fund yields 3.83% annually. XLE has a Zacks Rank #2 (Buy).
Steel producers underperform if oil prices crater. The industry supplies materials to build and expand oil drilling operations. Since an oil price rally can result in more capital expenditure by drillers, steel stocks should soar even higher.
Notably, many global oil and gas giants are expanding their investments in energy infrastructure of North Africa amid increased demand from the European nations, according to a WSJ article. With the political backdrop stabilizing, North Africa has explored more avenues for investments in the energy infrastructure. This could be a tailwind for steel stocks.
Rising energy prices do not bode well for retailers as consumers’ wallets get squeezed from higher outlays on gas stations. In fact, not only oil, overall inflation will be rising, hurting consumers’ buying power. This, in turn, is likely to lead the Fed to hike rates faster all over again. Rising rates, in turn, would again weigh on consumers’ ability to shell out on discretionary items.
Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. After buying crude, refiners transform it to the finished product gasoline. Now, with crude prices rising, refiners may see a lower crack spread and their profitability may be hurt.
The airline sector also performs better in a falling crude scenario. This is especially true as energy costs form a major portion of the overall cost of this sector. So, rising crude prices are likely to curb earnings of airline companies.
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Sector ETFs to Benefit/Lose on Surprise OPEC+ Output Cut
Oil prices increased considerably (i.e., by about 8%) on Apr 3 as OPEC+ producers agreed a surprise oil output cut on Sunday. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, decided to cut production targets by about 1.16 million barrels per day from May. The cut will run until the end of 2023.
The output cut is in addition to the 2 million barrels per day cut announced last October by the oil cartel. Per Reuters, the latest announcement brings the total output reduction to 3.66 million barrels per day (bpd), which roughly equals to 3.7% of the global demand.
The move also came on the back of Russia’s decision to trim oil production by 500,000 barrels per day until the end of 2023, according to the country’s Deputy Prime Minister Alexander Novak. The head of investment firm Pickering Energy Partners expect this oil production cut to boost prices by $10 per barrel, as quoted on Reuters.
Apart from the OPEC+ production cut, the recovery of global oil demand from China reopening is also helping the oil demand and prices. Per CNBC, about 38.5% of global oil demand recovery is likely to come from China.
Oil to Hit $100 Per Barrel Soon?
“OPEC+‘s plan for a further production cut may push oil prices toward the $100 mark again, considering China’s reopening and Russia’s output cuts as a retaliation move against western sanctions,” CMC Markets’ analyst Tina Teng told CNBC. In March, oil prices nosedived to their lowest since December 2021, as the banking rout was thought to be weighing on global economic growth and oil demand.
However, with the backing crisis having been managed efficiently and timely and the OPEC+ continuing output cuts, we can expect a meaningful rally in oil prices in the near term. Against this backdrop, it would be prudent to discuss ETF areas that tend to gain on rising crude prices as well as the ones that are likely to underperform.
Gainers
Energy – Energy Select Sector SPDR Fund (XLE - Free Report)
This is the most obvious choice. If oil price is staging an uptrend on reduced supplies, oil exploration and production stocks are sure to benefit as these companies will have a chance to pump more oil over the medium term. Plus, the fund yields 3.83% annually. XLE has a Zacks Rank #2 (Buy).
Steel – VanEck Vectors Steel ETF (SLX - Free Report)
Steel producers underperform if oil prices crater. The industry supplies materials to build and expand oil drilling operations. Since an oil price rally can result in more capital expenditure by drillers, steel stocks should soar even higher.
Notably, many global oil and gas giants are expanding their investments in energy infrastructure of North Africa amid increased demand from the European nations, according to a WSJ article. With the political backdrop stabilizing, North Africa has explored more avenues for investments in the energy infrastructure. This could be a tailwind for steel stocks.
Losers
Retail - SPDR S&P Retail ETF (XRT - Free Report)
Rising energy prices do not bode well for retailers as consumers’ wallets get squeezed from higher outlays on gas stations. In fact, not only oil, overall inflation will be rising, hurting consumers’ buying power. This, in turn, is likely to lead the Fed to hike rates faster all over again. Rising rates, in turn, would again weigh on consumers’ ability to shell out on discretionary items.
Oil Refiners – VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. After buying crude, refiners transform it to the finished product gasoline. Now, with crude prices rising, refiners may see a lower crack spread and their profitability may be hurt.
Airlines - U.S. Global Jets ETF (JETS - Free Report)
The airline sector also performs better in a falling crude scenario. This is especially true as energy costs form a major portion of the overall cost of this sector. So, rising crude prices are likely to curb earnings of airline companies.