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Iran Sanctions, Low Inventories Aid Oil Prices: 5 Fund Picks

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On Sep 24, oil prices continue to increase as Trump’s oil sanctions on Iran are taking effect as Iran’s oil exports have declined by 35% since April. Additionally, domestic crude inventories fell to a three and a half year low, which in turn boosted oil prices.

Also, Brent oil is evidently nearing the desired level of $80 a barrel following U.S. sanctions on Iran. Following the recent recovery in oil prices, mutual funds that have significant exposure to the energy sector could be solid investments.

Geopolitical Tensions Benefit Oil Prices

On May 8, President Trump canceled the Iran nuclear deal and called it “a horrible one-sided deal that should have never, ever been made.” After initial criticism, Trump’s decision is clearly showing results now. With less than two months left before U.S. sanctions on Iranian crude on Nov 5, Iranian oil exports fell 35% from April to early September.

In fact, Iran’s third-largest oil exporter, South Korea, already stopped obtaining oil from Iran last month after purchasing 194,000 barrels per day in July. Other major exporters like India, China and Japan are also preparing to live without Iranian crude supplies ahead of the Nov 5 deadline. Additionally, 71 foreign companies are planning to exit Iran, as per data by think tank, Foundation for Defense of Democracies.

U.S. Crude Stockpiles Post Surprise Slump

On Sep 24, WTI crude price futures rose 1.2% to reach $71.60, while Brent crude price futures advanced 1.3% to settle at $79.82, closing near the $80 level. Along with Iran sanctions, the gain was triggered by a report from the U.S. Energy Information Administration (EIA) per which U.S. commercial crude oil inventories fell 2.1 million barrels to 394.1 million for the week ended Sep 14. U.S. commercial crude oil inventories posted their fifth consecutive weekly fall and reached the lowest level since 2015.

Additionally, Saudi Arabia has agreed to keep oil prices “at about $80 and they don’t want prices to go below $70,” per a Reuters report earlier this month. Further, on Sep 18, Saudi Arabia reportedly said that for the short run the country is comfortable with present crude prices — Brent oil prices increasing over $80 per barrel.

Meanwhile, on Sep 23, Saudi Arabia energy minister Khalid al-Falih after a meeting between the joint OPEC and non-OPEC ministerial monitoring committee said crude production in "October will be even higher." However, he added that the country’s output levels will be influenced by customer demand and not intended to manipulate oil prices.

5 Best Energy Funds to Buy

As discussed above, the energy sector has witnessed significant growth in recent times. This is borne out by the fact that the Energy Select Sector SPDR (XLE) has gained 9.5% in the past six months. Additionally, mutual funds related to this sector registered strong returns. According to Morningstar, the equity energy mutual fund posted year-to-date and one-year annualized returns of 5.1% and 15.3%, respectively.

Against this backdrop, 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 witnessed encouraging returns during their last bull market, and their minimum initial investment is within $5000.

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 carries an expense ratio of 0.38% compared with the category average of 1.36%. Moreover, VGENX requires a minimal initial investment of $3,000. The fund has one-year annualized returns of 21.2%.

The fund carries a Zacks Mutual Fund Rank #2. James P. Stetler is one of the fund managers of VGENX since 2012. Further, as of the last filing, Exxon Mobil is the top holding for VGENX.

Fidelity Advisor Energy A (FANAX - Free Report) invests a huge part of its assets in securities of companies principally engaged in the energy field. FANAX seeks appreciation of capital. The fund invests in both U.S. and non-U.S. companies.

FANAX carries an expense ratio of 1.09% compared with the category average of 1.36%. Moreover, FANAX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 29.1%.

The fund carries a Zacks Mutual Fund Rank #1. John Dowd is the fund manager of FANAX since 2006. Further, as of the last filing, Chevron is the top holding for FANAX.

Invesco Energy Investor (FSTEX - Free Report) seeks capital growth for the long run. The fund invests a bulk of its assets in equity securities of companies involved in energy-related industries.  FSTEX mainly focuses on investing in common stocks.

FSTEX carries an expense ratio of 1.33% compared with the category average of 1.36%. Moreover, FSTEX requires a minimal initial investment of $1,000. The fund has one-year annualized returns of 21.9%.

The fund carries a Zacks Mutual Fund Rank #2. Norman MacDonald is the fund manager of FSTEX since 2013. Further, as of the last filing, BP Plc is the top holding for FSTEX.

BlackRock Natural Resources Investor A (MDGRX - Free Report) invests a large chunk of its assets in securities of companies that are engaged in the natural resources industry, like energy, oil and mining. The fund seeks growth of capital for the long run.

MDGRX carries an expense ratio of 1.13% compared with the category average of 1.34%. Moreover, MDGRX requires a minimal initial investment of $1,000. The fund has one-year annualized returns of 10.8%.

The fund carries a Zacks Mutual Fund Rank #2. Alastair Bishop is one of the fund managers of MDGRX since 2017. Further, as of the last filing, Nutrien is the top holding for MDGRX.

Fidelity Select Natural Gas (FSNGX - Free Report) seeks appreciation of capital. The fund invests the majority of its assets in company involved mainly in transmission, production and distribution of natural gas. FSNGX invests in both U.S. and non-U.S. companies.

FSNGX carries an expense ratio of 0.87% compared with the category average of 1.36%. Moreover, FSNGX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 18.4%.

The fund carries a Zacks Mutual Fund Rank #1. Ben Shuleva is the fund manager of FSNGX since 2014. Further, as of the last filing, EOG Resources is the top holding for FSNGX.

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