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Oil price surged to a nearly six-month high on the news that the White House has pledged to deepen its crackdown on Iran. The Trump administration vowed to end waivers that had previously allowed eight countries to purchase crude from Iran, bringing oil exports to zero. Crude oil price jumped to more than $65 per barrel for the first time since November 2018 while Brent crude climbed to $74 for the first time since early November.
The end of waiver has added to supply concerns that is driving oil prices. Falling output in Venezuela hit by Trump sanctions imposed earlier this year on PDVSA (the Latin American nation's state-owned oil company), unexpected losses in Libya due to violence, OPEC-led fresh crude output cuts, signs of slowing production growth in the United States and disruption in a key Nigerian pipeline are also bolstering the bullish sentiment (read: Oil Spurts on Tight Supply: 5 ETFs in Focus).
Further, the Fed’s dovish outlook, which pushed the U.S. dollar down, led to a spike in oil price. Notably, a weak dollar made dollar-denominated assets cheap for foreign investors, potentially raising demand for commodities.
Moreover, hedge funds and other money managers are betting that rising tensions around the globe will keep fueling oil’s rebound this year. The net-long WTI position — the difference between bets on higher prices and wagers on a decline — rose 10%, per the U.S. Commodity Futures Trading Commission. Long positions climbed 8.4% while shorts declined 6.5%.
Higher Oil Price: A Blessing or Curse?
Higher oil price is a boon to energy stocks, especially producers and explorers, which derive most of their revenues from selling the crude that they extract. This is because the cost of oil production or extraction remains low as companies look to lock in supply contracts at higher prices. The gap between production cost and selling price keeps on rising when oil price surges even higher, leading to fat profit margins and thus pushes up a company’s share price. The oil producing nations thus also got a boost (read: ETFs & Stocks to Ride on Oil's Biggest Quarter in Decade).
While almost every corner of the energy segment is shining, oil refiners might be hit. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, higher oil prices would crimp margins for refiners, leading to weak stock prices.
Further, higher oil price increase gasoline and jet prices. The resultant inflationary pressure will raise the price of products, leading to reduced consumer spending, which accounts for more than two-thirds of the U.S. economic activity. The discretionary and retail sectors will thus bear the brunt.
Apart from these, higher oil price is a major threat to oil-consuming nations like India, Turkey, South Africa. After all, higher oil prices would restrict tax revenues or GDP growth opportunities in big oil-importing countries. This is especially true as imports become more expensive and exports less valuable. It will lead to deterioration in balance of payments, lower output, and increase in inflation and unemployment rate in these countries, thereby thwarting overall economic growth.
Given this, we have highlighted ETFs that are expected to benefit/lose from higher oil price:
This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $863.8 million, it holds 24 stocks in its basket and charges 35 bps in annual fees. The product has a Zacks ETF Rank #3 (Hold) with a High risk outlook.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This fund provides exposure to oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $2.3 billion and holds 64 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook (read: Oil ETFs Surge as Chevron Plans to Buy Anadarko).
VanEck Vectors Russia ETF
This product offers exposure to 27 publicly traded companies that are incorporated in Russia or outside but have at least 50% of their revenues/related assets in Russia. It follows the MVIS Russia Index, charging investors 67 bps in annual fees. RSX is popular and liquid with AUM of $1.4 billion and has a Zacks ETF Rank #3 with a High risk outlook.
This pure-play ETF provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product holds 34 securities. The fund has gathered $81.1 million in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Why Top-Ranked Airlines ETF is Strong at the Start of Q2).
With AUM of $20.5 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, holding 24 stocks. The product charges 59 bps in annual fees.
XRT targets the retail sector and tracks the S&P Retail Select Industry Index. It is home to 94 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $353.6 million and has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETFs & Stocks to Tap on Highest Retail Sales Gain in 1.5 Years).
This ETF provides exposure to the largest 52 Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $836 million and trades in good volume of around 148,000 million shares a day. The product is a high-cost choice in the space, charging 92 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
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ETFs to Buy/Avoid on Higher Oil Prices
Oil price surged to a nearly six-month high on the news that the White House has pledged to deepen its crackdown on Iran. The Trump administration vowed to end waivers that had previously allowed eight countries to purchase crude from Iran, bringing oil exports to zero. Crude oil price jumped to more than $65 per barrel for the first time since November 2018 while Brent crude climbed to $74 for the first time since early November.
The end of waiver has added to supply concerns that is driving oil prices. Falling output in Venezuela hit by Trump sanctions imposed earlier this year on PDVSA (the Latin American nation's state-owned oil company), unexpected losses in Libya due to violence, OPEC-led fresh crude output cuts, signs of slowing production growth in the United States and disruption in a key Nigerian pipeline are also bolstering the bullish sentiment (read: Oil Spurts on Tight Supply: 5 ETFs in Focus).
Further, the Fed’s dovish outlook, which pushed the U.S. dollar down, led to a spike in oil price. Notably, a weak dollar made dollar-denominated assets cheap for foreign investors, potentially raising demand for commodities.
Moreover, hedge funds and other money managers are betting that rising tensions around the globe will keep fueling oil’s rebound this year. The net-long WTI position — the difference between bets on higher prices and wagers on a decline — rose 10%, per the U.S. Commodity Futures Trading Commission. Long positions climbed 8.4% while shorts declined 6.5%.
Higher Oil Price: A Blessing or Curse?
Higher oil price is a boon to energy stocks, especially producers and explorers, which derive most of their revenues from selling the crude that they extract. This is because the cost of oil production or extraction remains low as companies look to lock in supply contracts at higher prices. The gap between production cost and selling price keeps on rising when oil price surges even higher, leading to fat profit margins and thus pushes up a company’s share price. The oil producing nations thus also got a boost (read: ETFs & Stocks to Ride on Oil's Biggest Quarter in Decade).
While almost every corner of the energy segment is shining, oil refiners might be hit. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, higher oil prices would crimp margins for refiners, leading to weak stock prices.
Further, higher oil price increase gasoline and jet prices. The resultant inflationary pressure will raise the price of products, leading to reduced consumer spending, which accounts for more than two-thirds of the U.S. economic activity. The discretionary and retail sectors will thus bear the brunt.
Apart from these, higher oil price is a major threat to oil-consuming nations like India, Turkey, South Africa. After all, higher oil prices would restrict tax revenues or GDP growth opportunities in big oil-importing countries. This is especially true as imports become more expensive and exports less valuable. It will lead to deterioration in balance of payments, lower output, and increase in inflation and unemployment rate in these countries, thereby thwarting overall economic growth.
Given this, we have highlighted ETFs that are expected to benefit/lose from higher oil price:
ETFs to Gain
VanEck Vectors Oil Services ETF (OIH - Free Report)
This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $863.8 million, it holds 24 stocks in its basket and charges 35 bps in annual fees. The product has a Zacks ETF Rank #3 (Hold) with a High risk outlook.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This fund provides exposure to oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $2.3 billion and holds 64 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook (read: Oil ETFs Surge as Chevron Plans to Buy Anadarko).
VanEck Vectors Russia ETF
This product offers exposure to 27 publicly traded companies that are incorporated in Russia or outside but have at least 50% of their revenues/related assets in Russia. It follows the MVIS Russia Index, charging investors 67 bps in annual fees. RSX is popular and liquid with AUM of $1.4 billion and has a Zacks ETF Rank #3 with a High risk outlook.
ETFs to Lose
U.S. Global Jets ETF (JETS - Free Report)
This pure-play ETF provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product holds 34 securities. The fund has gathered $81.1 million in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Why Top-Ranked Airlines ETF is Strong at the Start of Q2).
VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
With AUM of $20.5 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, holding 24 stocks. The product charges 59 bps in annual fees.
SPDR S&P Retail ETF (XRT - Free Report)
XRT targets the retail sector and tracks the S&P Retail Select Industry Index. It is home to 94 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $353.6 million and has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETFs & Stocks to Tap on Highest Retail Sales Gain in 1.5 Years).
iShares India 50 ETF (INDY - Free Report)
This ETF provides exposure to the largest 52 Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $836 million and trades in good volume of around 148,000 million shares a day. The product is a high-cost choice in the space, charging 92 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>