OPEC oil producers surprisingly clinched a “pre-accord” deal – first time in eight years – to curb production in an informal meeting in Algeria. However, as indicated earlier, the agreement will be finalized at its formal policy meeting in November end in Vienna (read: Oil ETFs: Short-Term Threat, Long-Term Opportunity?).
The news came as a nice surprise to the world as nobody expected the move given the ongoing differences between the OPEC biggie Saudi and Iran. Notably, Iran which has been boosting production since the international sanctions on it were lifted in January.
Iran, producing over 3.6 million barrels per day (bpd) currently, seems to be in no mood to freeze/curb production. Because when the country was banned, other oil producing nations had raised their output limit to fill the void. Prior to the deal, Iran noted that it sought to attain its prior market share -- 12.7% of the OPEC output.
Still, in a desperate attempt to contain the free-falling oil prices, OPEC nations look to freeze an output cut deal in November. Investors should also note that“pre-accord” says that “Iran would not have the same proportional reductions as other countries”, but would not cross the output limit of 3.7 million barrels a day, as per an adviser to Algeria’s energy minister.
Needless to say, oil prices – which slid over 50% since mid-2014 – jumped following this news. WTI crude ETF United States Oil Fund (USO - ETF report) and Brent crude ETF (BNO - ETF report) tacked on over 4.9% and 5.3% gains respectively on the news. The largest energy ETF Energy Select Sector SPDR ETF (XLE) rose about 4.3%.
While the move is good for oil and energy related ETFs, this can be damaging for several other kind of investments. In this light, investors may consider avoiding the ETFs mentioned below:
PowerShares Dynamic Leisure and Entertainment ETF (PEJ - ETF report)
High energy prices mean less disposable income for consumers. Consumers who became used to shelling out less on gas stations, would see less savings to splurge on discretionary items. This trend may hurt this leisure ETF.
Market Vectors Oil Refiners ETF (CRAK - ETF report)
Investors should note that companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. As a result, this oil refiner ETF would be hit by a rise in oil prices. That is why CRAK nudged up just 0.03% on September 28 when oil exploration and production ETF like SPDR S&P Oil & Gas Exploration & Production ETF (XOP - ETF report) gained over 6.2%.
SPDR S&P Transportation ETF (XTN - ETF report)
Since energy costs form a major portion of the overall costs of the transportation sector, transportation ETF would likely be hard hit.
US Global Jets ETF (JETS - ETF report)
Since fuel costs account for a large portion of airlines’ operating expenses, higher oil price is a negative for this airline ETF (read: Can Q2 Earnings Save Airline ETF from Being Grounded?).
iShares India 50 ETF (INDY - ETF report)
India may be one of the wining investment proposition at this point of time, but an oil price rebound will spell trouble for this better-positioned emerging market. Notably, India imports more than 75% of its oil requirements, thus being highly susceptible to oil prices.
iShares MSCI Japan (EWJ - ETF report)
Japan is the world's largest liquefied natural gas importer and third-largest net importer of crude oil and oil products, as per EIA. Due to its scarce resources, Japan needs to import almost all its energy requirements (read: 3 Country ETFs to Buy on Cheaper Oil Prices).
WisdomTree Korea Hedged Equity Fund (DXKW - ETF report)
South Korea too depends heavily on crude oil imports trading in about 97% of its requirements. Quite expectedly, rising oil prices could have an adverse impact on its economy, indicating some likely losses for this country ETF.
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