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The global oil market witnessed a substantial rally recently, with prices reaching their highest levels since mid-April. This surge was aided by a combination of geopolitical tensions and extended output cuts by major oil-producing nations. Below we highlight the triggering factors in detail.
Attack on Russian Oil Export Hub: Ukraine's naval drone attack on Russia's port of Novorossiysk, a crucial hub for Russian oil exports on the Black Sea, heightened geopolitical tensions. This incident led to concerns about potential disruptions in oil supply from Russia, the world's second-largest oil exporter, per a CNBC article.
Saudi Arabia's Extended Production Cut: OPEC ace Saudi Arabia, the world's top oil exporter, extended its voluntary crude oil output cut of one million barrels per day until the end of September. The initial cut was implemented in July through August and was later extended with the possibility of further extensions and deepening.
Market Reactions and Analyst Insights
The impact of these geopolitical events on the oil market was immediate, leading to a surge in oil prices. Global benchmark Brent futures rose to $85.22 per barrel, while U.S. West Texas Intermediate (WTI) futures reached $81.10 per barrel, both the highest levels seen since mid-April. United States Oil ETF (USO - Free Report) is up 12% past month while United States Brent Oil ETF (BNO - Free Report) has added more than 10%.
Josh Young, Chief Investment Officer at Bison Interests, a prominent oil and gas investment firm, predicts even higher prices due to reduced oil supplies. Young believes that over the next five years, oil prices will remain volatile and continue to rise, as quoted on the CNBC article.
On the other hand, Citi's Ed Morse, the global head of commodity research at the bank, is relatively more optimistic about crude oil supplies after September. He anticipates that Saudi Arabia and Russia's output will likely increase in October, leading to a potential price ceiling of $90 per barrel this quarter. Morse also cites limited demand growth, particularly in China, as a contributing factor to price stability beyond the current quarter.
Sector ETFs to Benefit
Below we highlight a few sectors and their ETFs that could benefit from an oil price rally.
Energy Exploration – 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.
Companies offering oilfield services, such as drilling, well completion, and maintenance, are also expected to witness increased demand. As oil producers ramp up their operations, they will require more services to optimize their production and operations.
The steel 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.
Renewable Energy – iShares Global Clean Energy ETF (ICLN - Free Report)
The renewable energy sector might also benefit indirectly from the oil price rally. As oil prices rise, there could be a stronger push towards alternative and cleaner energy sources (as investors would look for other alternatives), leading to increased investment in renewables. While renewable energy infrastructure was extremely costly before, the costs have declined a lot in recent times.
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Oil Price Rallies: Sector ETFs to Benefit
The global oil market witnessed a substantial rally recently, with prices reaching their highest levels since mid-April. This surge was aided by a combination of geopolitical tensions and extended output cuts by major oil-producing nations. Below we highlight the triggering factors in detail.
Attack on Russian Oil Export Hub: Ukraine's naval drone attack on Russia's port of Novorossiysk, a crucial hub for Russian oil exports on the Black Sea, heightened geopolitical tensions. This incident led to concerns about potential disruptions in oil supply from Russia, the world's second-largest oil exporter, per a CNBC article.
Saudi Arabia's Extended Production Cut: OPEC ace Saudi Arabia, the world's top oil exporter, extended its voluntary crude oil output cut of one million barrels per day until the end of September. The initial cut was implemented in July through August and was later extended with the possibility of further extensions and deepening.
Market Reactions and Analyst Insights
The impact of these geopolitical events on the oil market was immediate, leading to a surge in oil prices. Global benchmark Brent futures rose to $85.22 per barrel, while U.S. West Texas Intermediate (WTI) futures reached $81.10 per barrel, both the highest levels seen since mid-April. United States Oil ETF (USO - Free Report) is up 12% past month while United States Brent Oil ETF (BNO - Free Report) has added more than 10%.
Josh Young, Chief Investment Officer at Bison Interests, a prominent oil and gas investment firm, predicts even higher prices due to reduced oil supplies. Young believes that over the next five years, oil prices will remain volatile and continue to rise, as quoted on the CNBC article.
On the other hand, Citi's Ed Morse, the global head of commodity research at the bank, is relatively more optimistic about crude oil supplies after September. He anticipates that Saudi Arabia and Russia's output will likely increase in October, leading to a potential price ceiling of $90 per barrel this quarter. Morse also cites limited demand growth, particularly in China, as a contributing factor to price stability beyond the current quarter.
Sector ETFs to Benefit
Below we highlight a few sectors and their ETFs that could benefit from an oil price rally.
Energy Exploration – 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.
Oilfield Services – VanEck Oil Services ETF (OIH - Free Report)
Companies offering oilfield services, such as drilling, well completion, and maintenance, are also expected to witness increased demand. As oil producers ramp up their operations, they will require more services to optimize their production and operations.
Steel – VanEck Vectors Steel ETF (SLX - Free Report)
The steel 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.
Renewable Energy – iShares Global Clean Energy ETF (ICLN - Free Report)
The renewable energy sector might also benefit indirectly from the oil price rally. As oil prices rise, there could be a stronger push towards alternative and cleaner energy sources (as investors would look for other alternatives), leading to increased investment in renewables. While renewable energy infrastructure was extremely costly before, the costs have declined a lot in recent times.