After struggling for nearly two years, energy mutual funds have managed to perform well so far this year. It continued to finish in the green during the third quarter following healthy gains in the first half of the year. The positive intention of major oil producing nations to control crude production in order to boost commodity price played a significant role in recovery of the category. After reaching 12-year lows in February, oil prices recovered significantly thereafter to hover around $50 a barrel.
The broader energy sector – Energy Select Sector SPDR ETF XLE – gained 3.6% in the third quarter, compared wirh the broad-based Dow Jones Industrial Average and the S&P 500 index’s gains of 2.00% and 3.11%, respectively, over the same period.
OPEC’s Oil Output Cut: Biggest Move in Q3
After widespread speculations, members of the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia decided to trim oil production for the first time in the last eight years in their meeting in Algeria last month. The organization, which supplies around 40% of the world's crude, stated that it would cut production by as much as 750,000 barrels a day starting in November in order to provide support to commodity prices. The move aims to trim output to 32.5-33.0 million barrels per day from the current 33.5 million barrels per day. (Also Read: 5 Energy Mutual Funds to Play OPEC Oil Production Cut)
The International Energy Agency (IEA) has already stated that trimming production by 200,000 bpd to 33 million bpd will make supplies 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.
However, there are enough doubts regarding whether the other major producers, including Iran, will walk the same path or not. Concerns were escalated further as these nations continued to produce at record levels during the quarter. For instance, OPEC’s crude production hit a record high of 33.64 million barrel per day (bpd) last month, while crude production in non-OPEC nations increased around 500,000 bpd, according to IEA. Meanwhile, sluggish demand throughout the globe continued to weigh on the sector.
Separately, rig counts throughout the globe, which provide an indication of activities in the domain, increased significantly during the quarter. According to Baker Hughes, international rig counts increased 7 units during the quarter to 934. Also, rig count in the U.S. soared up 92 units during the same period to 509 units.
Q3 Performance of Energy Mutual Funds
As mentioned earlier, energy mutual funds came up with healthy gains during the third quarter. Out of the 41 funds from the category we study, all funds finished in the positive territory last quarter except one. Only Rydex Energy Services Inv RYVIX, which is a Zacks Mutual Fund Rank #4 (Sell) product, ended in the red by losing 0.4% during the period.
Here is the list of top performing energy mutual funds in the third quarter:
US Global Investors Global Res PSPFX
Williston Basin/Mid-North America Stk A ICPAX
ProFunds Oil Equipment Svc & Dist Svc OEPSX
Advisory Research MLP & Energy Income A INFRX
Fidelity Select Natural Gas FSNGX
Fidelity Select Energy FSENX
Ivy Energy A IEYAX
Fidelity Advisor Energy T FAGNX
Waddell & Reed Energy A
Fidelity Select Natural Resources Port FNARX
In the top 10 performing mutual funds table represented above, we see that most of the funds in the list hold either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). Though third quarter gains were lower than the second quarter, it remained significantly higher than the first quarter. Meanwhile, banking on the favorable Zacks Mutual Fund Ranks, it can be concluded that these funds also have the potential to provide impressive returns in the days ahead.
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