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Mutual Fund Commentary

Despite the prevailing differences between arch rivals Saudi Arabia and Iran, the Organization of the Petroleum Exporting Countries (OPEC) reached a preliminary accord to curb oil production. Such an unprecedented move immediately sent oil prices rallying. A weekly decline in U.S. crude supply also helped oil prices gain ground.

With oil prices going through the roof, energy shares moved north. This makes investing in mutual funds with considerable exposure to the energy sector a judicious move.

OPEC to Cut Oil Output

After a six-hour gathering in the Algerian capital, members of the OPEC agreed to curtail crude output. Such a decision has been taken for the first time since 2008, aimed at addressing supply glut concerns. OPEC officials have decided to form a committee to determine how much of production each country would have to cut. The report on the same will be presented in the group’s next meeting, to be held in November.

Most of the major oil producers in OPEC have been pumping oil close to the maximum capacity in recent times. They have been competing among themselves for buyers. Iran’s commitment to boost production has proved to be a major hindrance, especially, when Saudi Arabia refused to cut production unless Iran does.

Nevertheless, the officials took the unprecedented step, proposing to cut its collective output between 32.5 million barrels per day (bpd) and 33 million bpd, down from August’s 33.2 million bpd. The International Energy Agency had already stated that trimming production by 200,000 bpd to 33 million bpd will bring supply more in line with demand until the second half of next year. Another 700,000 bpd cut in production will help put an end to the glut by the end of this year.

The OPEC-Saudi Arabia Pact

OPEC is responsible for over 40% of the world’s oil production and has always remained committed toward matching global supply and demand. However, the group gave in to the requests of its largest producer Saudi Arabia in Nov 2014. Saudi Arabia sought greater market share, ignoring the need for a balancing act. Rise in shale oil production was cited to be the primary reason behind the motive. Shale oil production had added around 5 million bpd of oil production in the market in just half a decade’s time.

U.S. shale oil producers remained resilient at times of slump in oil prices. Some producers went bankrupt while most chose to curtail expenses and maintain production. This led to a further fall in oil prices, hurting the financials of OPEC members. Venezuela and Nigeria are in deep financial crisis and claim that production needs to be cut to boost oil prices. It seems their wishes have been answered, with OPEC agreeing to limit production levels. This in turn gave oil prices a boost on Sep 28.

Supply Falls, Crude Oil Spikes

Along with OPEC’s decision to cap crude-oil output, drop in domestic crude supply drove oil prices higher. According to the U.S. Energy Information Administration, U.S. crude production edged down by 15,000 bpd to 8.497 million bpd for the week ending Sep 23. Crude inventories also fell by 1.9 million barrels last week.

The WTI and Brent crude gained 5.1% and 5.6% to $47.05 and $48.69 a barrel, respectively. Oil prices posted their biggest gain in more than five months and continue to hover near the $47 a barrel mark for a considerable period of time. And lest we forget, oil prices had tumbled to $26 a barrel on oversupply concerns during the beginning of the year (read more: Crude Oil Spikes 4.8% on OPEC Agreement to Cut Oil Output).

5 Best Energy Mutual Funds to Buy Now

Rise in oil prices propelled energy share prices. The broader Energy Select Sector SPDR (XLE - Free Report) gained 4.3%, the highest among the S&P 500 sectors. The energy sector also posted its largest gain since Jan 14 (read more: 5 Energy Stocks to Buy with Incredible Momentum).

Oils-Energy Sector Price Index

 

Given such encouraging trends, investing in fundamentally solid energy mutual funds will be a prudent choice. We have picked five mutual funds that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive year-to-date and 1-year returns, minimum initial investments within $5000 and low expense ratios.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Vanguard Energy Investor (VGENX - Free Report) invests the majority of its assets in common stocks of companies principally engaged in activities in the energy industry. VGENX’s year-to-date and 1-year returns are 19.1% and 17.1%, respectively. Annual expense ratio of 0.37% is below the category average of 1.49%. VGENX has a Zacks Mutual Fund Rank #1.

Fidelity Advisor Energy A (FANAX - Free Report) invests a large portion of its assets in securities of companies principally engaged in the energy field. FANAX’s year-to-date and 1-year returns are 16.4% and 12.8%, respectively. Annual expense ratio of 1.11% is below the category average of 1.49%. FANAX has a Zacks Mutual Fund Rank #2.

Fidelity Select Energy (FSENX - Free Report) invests the majority of its assets in securities of companies principally engaged in the energy field, including the conventional areas of oil, gas, electricity and coal. FSENX’s year-to-date and 1-year returns are 17.1% and 13.4%, respectively. Annual expense ratio of 0.79% is below the category average of 1.49%. FSENX has a Zacks Mutual Fund Rank #1.

Guinness Atkinson Global Energy (GAGEX - Free Report) invests a large portion of its net assets in equity securities of both U.S. and non-U.S. companies principally engaged in the production, exploration or discovery, or distribution of energy. GAGEX’s year-to-date and 1-year returns are 9.1% and 8.3%, respectively. Annual expense ratio of 1.41% is below the category average of 1.49%. GAGEX has a Zacks Mutual Fund Rank #2.

Columbia Global Energy & Natural Resources I (CERIX - Free Report) invests a major portion of its assets in equity securities of U.S. and foreign companies engaged in the energy and natural resources industries. CERIX’s year-to-date and 1-year returns are 12.6% and 11.4%, respectively. Annual expense ratio of 0.84% is below the category average of 1.4%. CERIX has a Zacks Mutual Fund Rank #1.

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