A Comprehensive Guide to Oil & Gas ETFs - ETF News And Commentary
February 20 2014 - 12:00PM
Zacks
Oil & Gas
Industry Outlook
Crude Oil
Expectations of an improving economy and bullish supply data have
strengthened oil prices to around $95 per barrel. Crude’s recent
run has been spurred by the Federal Reserve’s measured Taper
announcement, based on assertion that the U.S. economy was strong
enough. (Read: 3 ETFs You can love forever)
This has fueled hopes for robust fuel and energy demand in the
world's biggest oil consumer. The bullish momentum was further
propelled by positive revision to third quarter GDP numbers and
continued decline in U.S. supplies.
Partly offsetting this favorable view has been a spike in domestic
production -- now at their highest levels since 1988 – and
suggestions of increase in Libyan oil exports following months of
political turmoil.
The immediate outlook for oil, however, remains positive given the
commodity’s constrained supply picture. In particular, while the
Western economies exhibit sluggish growth prospects, global oil
consumption is expected to get a boost from sustained strength in
China, the Middle East, Central and South America that continue to
expand at a healthy rate. (Read: 3 Commodity ETFs still looking
strong)
According to the Energy Information Administration (EIA), which
provides official energy statistics from the U.S. Government, world
crude consumption grew by an estimated 1.1 million barrels per day
in 2013 to a record-high level of 90.3 million barrels per day.
The agency, in its most recent Short-Term Energy Outlook, said that
it expects global oil demand growth by another 1.2 million barrels
per day in 2014. Importantly, EIA’s latest report assumes that
world supply is also likely to go up by 1.2 million barrels per day
in 2014.
In our view, crude prices in the first half of 2014 are likely to
exhibit a sideways-to-bearish trend, trading in the $90-$100 per
barrel range. As North American supply remains strong and the
groundbreaking agreement with Iran makes it easier for the country
to sell the commodity, we are likely to experience a pressure in
the price of a barrel of oil. (Read: Healthcare boom brings this
sector ETF in focus)
Natural Gas
Over the last few years, a quiet revolution has been reshaping the
energy business in the U.S. The success of ‘shale gas’ – natural
gas trapped within dense sedimentary rock formations or shale
formations -- has transformed domestic energy supply, with a
potentially inexpensive and abundant new source of fuel for the
world’s largest energy consumer.
With the advent of hydraulic fracturing (or fracking) -- a method
used to extract natural gas by blasting underground rock formations
with a mixture of water, sand and chemicals -- shale gas production
is now booming in the U.S. Coupled with sophisticated horizontal
drilling equipment that can drill and extract gas from shale
formations, the new technology is being hailed as a breakthrough in
U.S. energy supplies, playing a key role in boosting domestic
natural gas reserves. (Read: Volatility ETFs crash as market fears
drop)
As a result, once faced with a looming deficit, natural gas is now
available in abundance. In fact, natural gas inventories in
underground storage hit an all-time high of 3.929 trillion cubic
feet (Tcf) in 2012. The oversupply of natural gas pushed down
prices to a 10-year low of $1.82 per million Btu (MMBtu) during
late April 2012 (referring to spot prices at the Henry Hub, the
benchmark supply point in Louisiana).
Investors continue to focus on temperature patterns to understand
the fuel’s economic dynamics. As it is, natural gas fundamentals
look uninspiring with supplies remaining ample in the face of
underwhelming demand. In fact, it is expected to take many years
for the commodity’s demand to match supply in the face of newer
projects.
Despite these issues, natural gas rallied to a two-year high
recently on the back of persistent decreases in supplies and
freezing cold weather conditions, which boost natural gas demand
for space heating by residential/commercial consumers.
PLAYING THE SECTOR THROUGH ETFs
Considering the turbulent market dynamics of the energy industry,
the safer way to play the volatile yet rewarding sector is through
ETFs. In particular, we would advocate tapping the energy bull by
targeting the exploration and production (E&P) group.
This sub-sector serves as a pretty good proxy for oil/gas price
fluctuations and can act as an excellent investment medium for
those who wish to take a long-term exposure within the energy
sector. While all oil/gas-related stocks stand to benefit from
rising commodity prices, companies in the E&P sector are the
best placed, as they will be able to extract more value for their
products. (See all energy ETFs here)
SPDR S&P Oil & Gas Exploration & Production
ETF (XOP):
Launched in June 19, 2006, XOP is an ETF that seeks investment
results corresponding to the S&P Oil & Gas Exploration
& Production Select Industry Index. This is an equal-weighted
fund consisting of 79 stocks of companies that finds and produces
oil and gas, with the top holdings being Magnum Hunter
Resources Corp. (MHR), Green Plains Renewable
Energy Inc. (GPRE) and Valero Energy
Corp. (VLO). The fund’s expense ratio is 0.35% and pays
out a dividend yield of 0.86%. XOP has about $617.7 million in
assets under management as of Jan 14, 2014.
iShares Dow Jones US Oil & Gas Exploration &
Production ETF (IEO):
This fund began in May 1, 2006 and is based on a free-float
adjusted market capitalization-weighted index of 75 stocks focused
on exploration and production. The top three holdings are
ConocoPhillips (COP), Phillips 66
(PSX) and EOG Resources Inc. (EOG). It charges
0.45% in expense ratio, while the yield is 0.90% as of now. IEO has
managed to attract $421.5 million in assets under management till
Jan 14, 2014.
PowerShares Dynamic Energy Exploration and
Production (PXE):
PXE, launched in October 26, 2005, follows the Energy Exploration
& Production Intellidex Index. Comprising of stocks of energy
exploration and production companies, PXE is made up of 30
securities.
Top holdings include Valero Energy Corp, Marathon Petroleum
Corp. (MPC) and EOG Resources Inc. The fund’s expense
ratio is 0.65% and the dividend yield is 1.75%, while it has got
$109.7 million in assets under management as of Jan 14, 2014.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30
Days. Click to get this free report
>>
FT-ISE R NAT GA (FCG): ETF Research Reports
MKT VEC-RETAIL (RTH): ETF Research Reports
US-OIL FUND LP (USO): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
SPDR-SP O&G EXP (XOP): ETF Research Reports
SPDR-SP RET ETF (XRT): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days. Click
to get this free report
SPDR S&P Oil and Gas Exp... (AMEX:XOP)
Historical Stock Chart
From Nov 2024 to Dec 2024
SPDR S&P Oil and Gas Exp... (AMEX:XOP)
Historical Stock Chart
From Dec 2023 to Dec 2024