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Energy ETFs & Stocks Soaring to Start 2018

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Oil saw a solid start to the New Year, with the return of geopolitical risk in Iran, tightening supply and soaring demand. In fact, the first trading day of 2018 marked the strongest start for oil price since January 2014, as both West Texas Intermediate (WTI - Free Report) and Brent opened above $60 per barrel (read: Oil Sees Strong Start to 2018 in 4 Years: ETFs to Play).

Brent has climbed above $68 per barrel, the highest since mid-2015 last week, while WTI rose above $62 per barrel. This has renewed confidence in the energy sector, setting the stage for a strong rally in the near term.

Unrest is Iran has stirred the energy market sparking fears over oil supply, which is currently in a tightening mode by OPEC-led output cuts. On the other hand, freezing temperatures in the United States has spurred short-term demand, especially for heating oil. The dual tailwinds have bolstered the already bullish oil market.

Bullish Fundamentals

The OPEC, Russia and other producers started cutting production last January and have agreed on doing so for the whole of 2018. Additionally, deteriorating economic situations in other large oil producers like Venezuela are also threatening oil output. Notably, Venezuelan oil production is falling by around 50,000 barrels a month, per the analyst at Norway-based DNB Bank.

On the other hand, improving global economic growth since the financial crisis, with consumption boom in both developed and emerging markets especially in China, falling crude oil inventories and Middle East tensions have raised the appeal for the commodity (read: 7 Biggest ETF Stories of 2017 to Continue in 2018).

Further, the oil market is in a state of backwardation (where later-dated contracts are cheaper than near-term contracts), which is acting as the biggest catalyst for the commodity. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. Moreover, hedge funds turned most bullish in years, betting that Brent crude’s near 35% rally over the past six months will continue this year with protests in Iran strengthening buying.

If these aren’t enough, a portfolio manager at Natixis Asset Management expects oil prices to hit $80 per barrel by the end of 2018. However, rising U.S. production, which is on the brink of hitting 10 million barrels per day, is somewhat dampening the outlook.  

Given bullish fundamentals, energy ETFs and stocks have generated handsome returns in the initial week of 2018. Below we have highlighted them:

Best ETFs

VanEck Vectors Oil Services ETF (OIH - Free Report) – Up 7%

This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to the companies involved in oil services to the upstream oil sector, which include oil equipment, oil services, or oil drilling. Holding 26 stocks in its basket, the ETF has AUM of $1.9 billion and charges 35 bps in annual fees. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

PowerShares Dynamic Oil & Gas Services Fund (PXJ - Free Report) – Up 6.9%

This product follows the Dynamic Oil Services Intellidex Index, which thoroughly evaluates companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. It holds 30 stocks in its basket and has amassed $38.2 million in its asset base. The fund charges 63 bps in annual fees and has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook (see: all the Energy ETFs here).

iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) – Up 6.8%

This fund offers exposure to3 5 U.S. companies that provide equipment and services for oil exploration and extraction by tracking the Dow Jones U.S. Select Oil Equipment & Services Index. It has accumulated $256.3 million in AUM and charges 44 bps in annual fees. IEZ has a Zacks ETF Rank #4 (Sell) with a High risk outlook.

SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) – Up 6.4%

With AUM of $394.2 million, this fund tracks the S&P Oil & Gas Equipment & Services Select Industry Index, which measures the performance of the companies engaged in the oil and gas equipment and services industry. It holds 38 securities in its basket and charges 35 bps in annual fees. The fund has a Zacks ETF Rank #4 with a High risk outlook.

Best Stocks

W&T Offshore Inc. (WTI - Free Report) – Up 31.7%

Having a market cap of $383.1 million, W&T Offshore is an independent oil and natural gas company focused primarily on the Gulf of Mexico area, including the deep water. The stock has a Zacks Rank #4 and a VGM Score of A.

Gastar Exploration Inc. – Up 29.5%

This is an exploration and production company focusing on developing primarily natural gas and has a market cap of $212.8 million. It has a Zacks Rank #3 and a VGM Score of C (read: 8 ETF Predictions for 2018).

Key Energy Services Inc. – Up 25.4%

Key Energy Services is an onshore, rig-based well servicing contractor. The stock has a Zacks Rank #3 and a VGM Score of C. It has a market cap of $211.3 million.

Parker Drilling Company Inc. – Up 25%

Parker Drilling Company, having a market cap of $123.9 million, provides high-performance contract drilling solutions, rental tools and project management services to the worldwide energy industry. The stock has a Zacks Rank #3 and a VGM Score of F.

Bottom Line

Though many of the products have an unfavorable Zacks Rank of #4 or 5, these are the winners to start the year. This suggests that the fundamentals for the energy market are extremely strong with the ability to stir up every kind of ETFs & stocks in the sector.

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