Oil prices reached their highest level in the last two weeks on May 15 after Saudi Arabia and Russia decided to extend crude production cuts till March 2018. Moreover, domestic crude inventories slumped for the fifth straight week for the week ended May 5, adding to the cheer surrounding oil. Following the steady recovery in oil prices, mutual funds that have significant exposure to the energy sector could be solid investments.
Global Crude Supply Concerns Ease Up
Oil prices are taking a breather after key OPEC member Saudi Arabia and major non OPEC exporter Russia, decided to extend crude production cuts till early 2018. In a meeting held at Beijing, Energy Minister of Saudi Arabia, Khalid al-Falih along with his Russian counterpart Alexander Novak said both the nations have "reached an understanding" to control their crude output "until March 31, 2018."
Saudi Arabia and Russia’s decision to continue cutting crude production by 1.8 million barrels per day (bpd) for nine more months reduced supply concerns and boosted oil prices. Both WTI and Brent crude prices rose 2.1% and 1.9% to $48.85 per barrel and $51.82 a barrel, respectively. During the day, oil prices rose as much as 3%, settling at their best levels in last two weeks.
U.S Crude Stockpiles Slumps
The U.S. Energy Information Administration (EIA) reported that U.S. commercial crude oil inventories fell 5.2 million barrels to 522.5 million for the week ended May 5. U.S. commercial crude oil inventories posted their fifth consecutive weekly fall, registering the longest stretch of declines since last September.
The EIA also reported that total motor gasoline inventories and distillate fuel inventories slumped by 0.2 million barrels and 1.6 million barrels, respectively. Decline in domestic crude and gasoline inventories also had a positive impact on oil prices.
Energy Sector in Focus
The Energy Select Sector SPDR (XLE) advanced 1.1% over the last five days and was the second biggest gainer among the S&P 500 sectors. Moreover, despite a weak performance over the last six months, the sector managed to increase 2.8% over the last one year. Additionally, in the past one year, equity energy and natural resources mutual funds have gained 4.7% and 12.7%, respectively.
With two major crude producing nations deciding to control output, other oil producers are expected to take a similar stance in OPEC’s next meeting on May 25. This development, along with a slump in domestic crude inventories is expected to take the energy sector northward in the near future.
5 Best Energy Funds to Buy
Here, we have highlighted five energy mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We also expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
These funds also come with low expense ratios. Moreover, they have encouraging returns in the last one year, and the minimum initial investment is within $5000.
Dreyfus Natural Resources A (DNLAX - Free Report) invests the lion’s share of its assets in companies from the natural resources sector. DNLAX seeks capital appreciation over the long run. The fund generally invests in both growth and value stocks, with strong exposure in major natural resources industries. DNLAX not only invests in domestic companies but also in foreign companies.
DNLAX’s return has been 14% in the last one year. Annual expense ratio of 1.34% is lower than the category average of 1.39%. The fund has a Zacks Mutual Fund Rank #1.
Fidelity Advisor Energy T (FAGNX - Free Report) seeks growth of capital over the long run. FAGNX invests a chunk of its assets in common stocks of companies engaged in operations related to the energy domain. The fund invests in securities of both U.S. and non-U.S. companies. It is a non-diversified fund and gives precedence to several factors including financial strength and economic condition before selecting a company.
FAGNX has returned 5.6% in the last one year. Annual expense ratio of 1.37% is lower than the category average of 1.41%. The fund has a Zacks Mutual Fund Rank #2.
Vanguard Energy Investor (VGENX - Free Report) invests a major portion of its assets in equity securities of companies from the energy sector. VGENX normally invests in stocks of companies that are engaged in the production, marketing, transmission and research of energy. The fund seeks growth of capital for the long run.
VGENX has returned 8.3% in the last one year. Annual expense ratio of 0.41% is lower than the category average of 1.41%. The fund has a Zacks Mutual Fund Rank #2.
Prudential Jennison Natural Resources A (PGNAX - Free Report) seeks capital appreciation for the long run. PGNAX invests a bulk of its assets in equity securities natural resources companies. Natural resources’ companies are those which deal in mining, exploration, processing and developing of products and services with respect to natural resources.
PGNAX has returned 7.8% in the last one year. Annual expense ratio of 1.25% is lower than the category average of 1.39%. The fund has a Zacks Mutual Fund Rank #2.
Fidelity Select Energy Service Portfolio (FSESX - Free Report) invests a bulk of its assets in securities of companies engaged in the energy service field, including those that provide services and equipment to the conventional areas of oil, gas, electricity, and coal. This non-diversified fund seeks appreciation of capital.
In the last one year, FSESX has returned 11.2%. Annual expense ratio of 0.84% is lower than the category average of 1.41%. The fund has a Zacks Mutual Fund Rank #1.
Want key mutual fund info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>