The global oil market witnessed a substantial rally recently, with prices reaching their highest levels since mid-April. This surge was aided by a combination of geopolitical tensions and extended output cuts by major oil-producing nations. Below we highlight the triggering factors in detail.
Attack on Russian Oil Export Hub: Ukraine’s naval drone attack on Russia’s port of Novorossiysk, a crucial hub for Russian oil exports on the Black Sea, heightened geopolitical tensions. This incident led to concerns about potential disruptions in oil supply from Russia, the world’s second-largest oil exporter, per a CNBC article.
Saudi Arabia’s Extended Production Cut: OPEC ace Saudi Arabia, the world’s top oil exporter, extended its voluntary crude oil output cut of one million barrels per day until the end of September. The initial cut was implemented in July through August and was later extended with the possibility of further extensions and deepening.
Market Reactions and Analyst Insights
The impact of these geopolitical events on the oil market was immediate, leading to a surge in oil prices. Josh Young, Chief Investment Officer at Bison Interests, a prominent oil and gas investment firm, predicts even higher prices due to reduced oil supplies. Young believes that over the next five years, oil prices will remain volatile and continue to rise, as quoted on the CNBC article.
On the other hand, Citi’s Ed Morse, the global head of commodity research at the bank, is relatively more optimistic about crude oil supplies after September. He anticipates that Saudi Arabia and Russia’s output will likely increase in October, leading to a potential price ceiling of $90 per barrel this quarter. Morse also cites limited demand growth, particularly in China, as a contributing factor to price stability beyond the current quarter.
Sector ETFs to Lose
Below we highlight a few sectors and their ETFs that could be hurt from an oil price rally.
Retail – SPDR S&P Retail ETF (XRT)
Rising energy prices do not bode well for retailers as consumers’ wallets get squeezed from higher outlays on gas stations. In fact, not only oil, overall inflation will be rising, hurting consumers’ buying power. This, in turn, is likely to lead the Fed to hike rates faster all over again. Rising rates, in turn, would again weigh on consumers’ ability to shell out on discretionary items.
Oil Refiners – VanEck Vectors Oil Refiners ETF (CRAK)
Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. After buying crude, refiners transform it to the finished product gasoline. Now, with crude prices rising, refiners may see a lower crack spread and their profitability may be hurt.
Airlines – U.S. Global Jets ETF (JETS)
The airline sector also performs better in a falling crude scenario. This is especially true as energy costs form a major portion of the overall cost of this sector. So, rising crude prices are likely to curb earnings of airline companies.
SPDR S&P Retail ETF (XRT): ETF Research Reports
U.S. Global Jets ETF (JETS): ETF Research Reports
VanEck Oil Refiners ETF (CRAK): ETF Research Reports
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