Oil price surged following escalation of tensions in the Middle East. Brent surged to about $70 per barrel — its highest price since September – while U.S. crude climbed to $63.79 per barrel — its highest price since April (read: 5 ETFs to Profit From Rise in Middle East Tension).
The U.S. air strike near the Baghdad International Airport killed top Iranian commander Qasem Soleimani last week sparking fears of a full-blown crisis between Washington and Tehran. Iran’s President Hassan Rouhani said that the country would no longer abide by any limits on its enrichment of uranium and Iraq’s parliament voted to expel U.S. troops from the country. On the other hand, President Donald Trump threatened Tehran that America will hit Iran "harder than they have ever been hit before" if it carried out retaliatory attacks or expelled U.S. troops from the country.
Further, the Fed’s dovish outlook, which pushed the U.S. dollar down, also supported a spike in oil price. Notably, a weak dollar made dollar-denominated assets cheap for foreign investors, potentially raising demand for commodities.
Higher Oil Price: A Boon or Bane?
Higher oil price is a boon to energy stocks, especially producers and explorers, who 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, leading to fat profit margins and thus pushes up a company’s share price. The oil producing nations thus also get a boost (read: Top-Performing Energy ETFs & Stocks of 2019).
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 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 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 and South Africa. After all, higher oil prices restrict tax revenues or GDP growth opportunities in big oil-importing countries. This is because 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 $779.8 million, it holds 25 stocks in its basket and charges 35 bps in annual fees. However, the product has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook. As the Zacks rank system takes into account asset class outlook, which is negative for energy, most ETFs in this space have #4 (Sell) or #5 ranks.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
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 $2.7 billion and holds 59 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #5 with a High risk outlook.
VanEck Vectors Russia ETF (RSX - Free Report)
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 65 bps in annual fees. RSX is popular and liquid with AUM of $1.3 billion and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Country ETFs to Top/Flop on US Air Raid at Baghdad).
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 $51.5 million in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #3 with a High risk outlook.
VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
With AUM of $34.6 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 25 stocks. The product charges 60 bps in annual fees (read: Iraq Attack: Sector ETF Winners and Losers).
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 87 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $219.9 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares India 50 ETF (INDY - Free Report)
This ETF provides exposure to the largest 50 Indian stocks by tracking the Nifty 50 Index. It has managed assets worth $788.1 million and is a high-cost choice in the space, charging 94 bps in annual fees. INDY has a Zacks ETF Rank #3 with a Medium risk outlook.
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