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ETFs to Benefit & Lose From Higher Oil Price

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After logging the best month since January 2022, oil price extended its rally this month to touch the highest levels since mid-April. Both Brent and U.S. crude notched their sixth consecutive weekly gains last week, the longest winning streak since December 2021 to January 2022.

U.S. crude has risen 20% in the past six weeks while Brent gained 17%. With the latest rally, crude oil has now recovered all its losses for the year.

The surge was driven by a tightening oil market fueled by surging crude demand and supply reductions by major OPEC+ players, Saudi Arabia and Russia. Russia announced it would slash crude exports by 500,000 barrels per day in August, while Saudi Arabia is extending its supply curbs into the next month.

Analysts estimate that crude demand is running at a record clip as OPEC+ cuts back production. Demand is also being boosted by solid second-quarter GDP data numbers, which showed that the economy grew 2.4% annually from 2% growth in the first quarter, thanks to resilience among consumers and businesses in the face of high interest rates. The data supported the Fed’s view that the economy can achieve a so-called “soft landing” (read: 5 ETFs to Ride On Solid Q2 Economic Growth).

Additionally, a decline in inventories at the largest U.S. storage hub has led to a bullish pricing pattern known as backwardation (where later-dated contracts are cheaper than near-term contracts in the oil futures market) in WTI's nearest two contracts. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is acting as the biggest catalyst for the commodity.

Further, the expectations that the Fed is nearing the end of its monetary tightening cycle have boosted market sentiment and contributed to the latest oil price rally. Moreover, speculators have been ramping up bullish bets on U.S. crude futures, pushing prices higher.

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 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 rising when oil price surges, leading to fat profit margins and thus pushing up a company’s share price. The oil-producing nations also get a boost.

Additionally, higher oil prices incentivize consumers to consider electric vehicles as an alternative to traditional gasoline-powered cars. Electric vehicle manufacturers may experience a boost in demand as environmentally-conscious consumers seek energy-efficient transportation options (read: Oil Logs Best Month in July in Over a Year: ETF Winners).

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, resulting in deterioration in the balance of payments, lower output, and an increase in inflation and unemployment rate in these countries. All these thwart overall economic growth.   

Given this, we have highlighted ETFs that are expected to benefit/lose from higher oil price.

ETFs to Benefit

VanEck Vectors Oil Services ETF (OIH - Free Report)

VanEck Vectors 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 26 stocks in its basket (read: 4 Energy ETFs to Tap the Oil Price Surge).

With AUM of $2.6 billion, VanEck Vectors Oil Services ETF charges 35 bps in annual fees. The product trades in an average daily volume of 547,000 shares and 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 for less than 4% share.

SPDR S&P Oil & Gas Exploration & Production ETF has accumulated $3.7 billion in its base and trades in an average daily volume of 4 million shares. The ETF charges 35 bps in fees per year and has a Zacks ETF Rank #3 with a High risk outlook.

Global X Autonomous & Electric Vehicles ETF (DRIV - Free Report)

Global X Autonomous & Electric Vehicles ETF seeks to invest in companies involved in the development of autonomous vehicle technology, electric vehicles (“EVs”), and EV components and materials. It follows the Solactive Autonomous & Electric Vehicles Index and holds 75 stocks in its basket. Global X Autonomous & Electric Vehicles ETF has key holdings in consumer discretionary and information technology with 37.2% and 26.2% share, each.

With AUM of $883.4 million, Global X Autonomous & Electric Vehicles ETF charges 68 bps in fees per year and trades in average daily volume of 165,000 shares.

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 AUM of $1.7 billion in its asset base. It charges investors 60 bps in annual fees. It trades in an average daily volume of 3.5 million shares and has a Zacks ETF Rank #3 with a High risk outlook (read: Airlines ETF Hits New 52-Week High).

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 80 stocks in its basket. SPDR S&P Retail ETF is well spread across various industries with a double-digit allocation each in apparel retail, specialty stores, automotive retail and broadline retail.

SPDR S&P Retail ETF is the largest and most popular in the retail space, with AUM of $465.2 million and an average trading volume of 5 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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 14.2% of assets. iShares India 50 ETF has key holdings in financials, information technology and energy.

iShares India 50 ETF has managed assets worth $647.9 million and is a high-cost choice in the space, charging 89 bps in annual fees. INDY trades in an average daily volume of 73,000 shares and has a Zacks ETF Rank #3 with a Medium risk outlook.  

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