Oil rallied to the highest level this year, with U.S. crude touching $85 per barrel and Brent climbing to $87.88 per barrel. The gains were driven by the anticipation of additional supply cuts from major oil-producing nations, Saudi Arabia and Russia, as well as declining inventories in the United States.

While most energy ETFs rallied this year, Invesco Dynamic Oil & Gas Services ETF PXJ, SPDR S&P Oil & Gas Equipment & Services ETF XES, Invesco S&P SmallCap Energy ETF PSCE, iShares U.S. Oil Equipment & Services ETF IEZ and VanEck Vectors Oil Services ETF OIH are leading the way higher.

Inside the Latest Rally

Saudi Arabia is widely expected to extend voluntary oil cuts into October and Russia will unveil a new OPEC+ supply cut deal this week. The majority of analysts anticipate Saudi Arabia to prolong its 1 million barrels per day (bpd) production reduction into October. Russia has already said it will cut exports by 300,000 bpd in September, following a 500,000-bpd cut in August.

Per the latest data from the Energy Information Administration, inventories have fallen to their lowest level this year, plunging 10.6 million barrels for the week ending Aug 25.

Further, surprise industrial outages and hurricane-related disruptions to U.S. production are also keeping the market tight. However, a return of additional barrels from Iran, as well as the possibility of the U.S. ending its curbs on both Iran and Venezuela, could increase supply.

Simultaneously, optimism around demand recovery is growing. Last month, the downturn in Eurozone manufacturing showed signs of easing, indicating that the worst may be over for the region’s struggling factories. Additionally, an unexpected rebound in China provided hope for economies reliant on exports. The combination of economic improvements will fuel demand. Both OPEC and the International Energy Agency are banking on China, the world’s largest oil importer, to bolster oil demand throughout 2023.

Added to the strength in oil price is the options markets, which have seen a series of bullish activity in recent weeks, with call volumes on U.S. futures rising to their highest since May.

Here, we have profiled the abovementioned ETFs:

Invesco Dynamic Oil & Gas Services ETF (PXJ) – Up 22.6%

Invesco Dynamic Oil & Gas Services ETF follows the Dynamic Oil Services Intellidex Index, which thoroughly evaluates companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. It holds 32 stocks in its basket.

Invesco Dynamic Oil & Gas Services ETF has accumulated $35.9 million and charges 63 bps in fees per year. It trades in an average daily volume of 18,000 shares and has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.

SPDR S&P Oil & Gas Equipment & Services ETF (XES) – Up 20.8%

SPDR S&P Oil & Gas Equipment & Services ETF tracks the S&P Oil & Gas Equipment & Services Select Industry Index, which measures the performance of the companies engaged in the oil and gas equipment and services industry. It holds 31 stocks in its basket with AUM of $368.7 million.

SPDR S&P Oil & Gas Equipment & Services ETF charges 35 bps in fees per year from investors and trades in an average daily volume of 105,000 shares. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

Invesco S&P SmallCap Energy ETF (PSCE) – Up 18.8%

Invesco S&P SmallCap Energy ETF offers exposure to the companies that are principally engaged in producing, distributing or servicing energy-related products, including oil and gas exploration and production, refining, oil services and pipelines. It tracks the S&P Small Cap 600 Capped Energy Index, holding 29 stocks in its basket.

Invesco S&P SmallCap Energy ETF has accumulated $246.7 million in its asset base and charges 29 bps in annual fees. It trades in an average daily volume of 43,000 shares and has a Zacks ETF Rank #3 with a High risk outlook.

iShares U.S. Oil Equipment & Services ETF (IEZ) – Up 16.4%

iShares U.S. Oil Equipment & Services ETF offers exposure to U.S. companies that provide equipment and services for oil exploration and extraction. It follows the Dow Jones U.S. Select Oil Equipment & Services Index, holding 28 stocks in its basket.

iShares U.S. Oil Equipment & Services ETF has amassed $208.5 million in its asset base while charging 40 bps in fees per year from investors. It trades in a volume of 43,000 shares a day on average and has a Zacks ETF Rank #3 with a High risk outlook.

VanEck Vectors Oil Services ETF (OIH) – Up 15%

VanEck Vectors Oil Services ETF 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. It holds 26 stocks in its basket.

With AUM of $2.6 billion, VanEck Vectors Oil Services ETF charges 35 bps in annual fees. The product trades in an average daily volume of 540,000 shares and has a Zacks ETF Rank #3 with a High risk outlook.

What Lies Ahead?

The outlook for the energy sector seems bright as oil demand will likely remain strong and supply tight.

The International Energy Agency forecasts world demand to hit a record high this year on strong air travel, power generation needs and surging Chinese petrochemical activity. Demand could grow this year by 2.2 million bpd to 102.2 million bpd. On the other hand, oil supply will not match the rise in demand as Saudi Arabia voluntarily cut output will outweigh increases in U.S. shale and by Iran and Venezuela.

Further, U.S. inventories are expected to shrink as record demand, producer supply cuts, weaker futures and rising storage costs all point to increasing drawdowns.
iShares U.S. Oil Equipment & Services ETF (IEZ): ETF Research Reports

SPDR S&P Oil & Gas Equipment & Services ETF (XES): ETF Research Reports

Invesco Oil & Gas Services ETF (PXJ): ETF Research Reports

VanEck Oil Services ETF (OIH): ETF Research Reports

Invesco S&P SmallCap Energy ETF (PSCE): ETF Research Reports

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