After a decent 2019, oil prices had a brilliant start to 2020, thanks mainly to the escalating tensions in the Middle East. The United States Oil Fund, LP (USO - Free Report) and United States Brent Oil Fund, LP (BNO - Free Report) have added 2.7% and 3.6%, so far, this January. This followed the yearly gains of 27.9% and 33.6% for the two ETFs, respectively.
Let’s see what could keep oil and energy stocks and ETFs steady this year.
U.S.-Iran Tension Likely to Prevail in 2020
The latest bonanza came after tensions flared up between the United States and Iran. A U.S. drone strike near the Baghdad international airport killed Iran’s top commander General Qassim Soleimani last week, fueling tensions between the two nations. The U.S. move came close on the heels of a New Year Eve attack by Iran-backed militias on the U.S. Embassy in Baghdad (read: Iraq Attack: Sector ETF Winners and Losers).
The United States and Iran have been at loggerheads for about one-and-a-half years now. As a result, “Saudi Arabia’s energy facilities as well as foreign tankers in and around the Persian Gulf have been the target of several attacks over the past year -- a region that includes OPEC’s five biggest producers,” per Bloomberg. These attacks were supposedly carried out by Iran. And the aftermath of the latest U.S. strikes has bolstered the possibility of more attacks.
Also, with the two Middle East countries’ (Iraq and Iran) joint oil output being more than 20% of the total OPEC output (according to data compiled by Bloomberg), higher chances of supply disruption has come into play, pushing up oil prices. We expect the simmering U.S.-Iran tension to act as a tailwind to oil prices this year.
Expansion in OPEC Output Cut
The OPEC group and allies inked a deal in mid-December to deepen production cut by 500,000 barrels per day through the end of the first quarterin order to support crude prices. Both investment banks Goldman Sachs and J.P. Morgan acknowledge the effectiveness of the OPEC output cut. J.P. Morgan, in fact, went on to forecast that the oil market will be in a deficit in 2020 by 200,000 bpd.
Expectations of a recovery in oil prices in 2020 boost hopes for better capital spending by upstream companies. This, in turn, will benefit the oil services stocks too as these companies generate their revenues from producers, or the upstream companies (read: 4 Sector ETFs That Beat the Market in Q4).
Receding Global Growth Worries
Ebbing U.S.-China trade tensions, ample policy easing in major developed and emerging economies, and lesser uncertainties related to Brexit could prop up global growth and spur demand for this liquid commodity. The IMF expects the global economy to recover in 2020.
The Fed has also hinted at no rate hikes in 2020, which could keep the dollar strength in check. With most commodities priced-in in the greenback, such Fed moves would be beneficial for commodities (read: Fed to Not Hike Rates in 2020: ETF Areas to Shine).
Investors should note that research firm Goldman Sachs upped its 12-month commodity returns projection by 3-6.4% in mid-December, courtesy of a raised outlook for oil. In a year’s time, Goldman predicts returns of 9.1% from energy.
What’s Cooking Up for Shale Drillers?
Having said all, we would like to note that surging U.S. production is still a concern for 2020.The U.S. output scaled up to nearly 13 million bpd, labeling the country with the world’s largest crude oil producer tag. However, output growth is decelerating. U.S. producers have cut the number of oil rigs operating. The total oil and gas rig count was 278 at the end of December, down 26% from the year-ago level, per service firm Baker Hughes.
Many market watchers are betting big on this slowdown in U.S. output growth. Shale drillers have $40 billion worth of debt maturing this year, according to Moody’s, as reported by the Wall Street Journal. The IEA forecast U.S. shale production growth is likely slow down to 1.1 million bpd this year, from the previous year’s 1.6 million bpd.
Energy ETFs That are in Rallying Mode
Against this backdrop, below we highlight a few energy ETFs that are gaining momentum lately.
S&P Oil & Gas Eqpt & Services SPDR (XES - Free Report) — Up 15.5% in the past month
Unconventional Oil & Gas Vaneck ETF (FRAK - Free Report) — Up 13.9%
Oil Services Vaneck ETF (OIH - Free Report) — Up 11.4%
Infracap MLP ETF (AMZA - Free Report) — Up 12.0%
DWA Energy Momentum Invesco ETF (PXI - Free Report) — Up 9.4%
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