Oil analysts forecast a sustain rally in the liquid commodity price as Saudi Arabia prolonged its voluntary one-million-barrel oil supply cut through to the end of the year. Notably, the initial supply cuts seem to have yielded positive results, with oil prices experiencing a notable 12% increase in the past month (as of Sep 15, 2023), reaching approximately $91 a barrel.
Russia too has moved to draw down global inventories and vowed to cut oil exports by 300,000 barrels per day until the end of the year. Both countries have said they will review their voluntary cuts on a monthly basis. Analysts at Bank of America have indicated they now believe oil prices could soon rally above $100, per a CNBC article.
According to Tamas Varga, an oil broker at PVM, the possibility of reaching the $100 price mark for oil seems “credible.” This assessment is based on factors such as production limitations in Saudi Arabia and Russia, upcoming refinery maintenance, a persistent diesel shortage in Europe, and a growing agreement that the current phase of tightening in the market will soon conclude.
In its latest monthly oil report, the International Energy Agency cautioned that the limitations on oil production imposed by Saudi Arabia and Russia are expected to lead to a significant shortfall in the market throughout the fourth quarter.
The renowned global energy authority also pointed out that, despite OPEC and non-OPEC members reducing production by over 2.5 million barrels per day since the beginning of the year, this reduction has thus far been counterbalanced by increased output from countries not part of the OPEC+ alliance, such as the United States and Brazil.
Christyan Malek, global head of energy strategy and head of EMEA oil and gas equity research at JPMorgan, expects oil to trade at around $80 over the long term.
Against this backdrop, we highlight below a few sector ETFs that can gain/lose if oil hits $100 soon.
ETFs to Benefit
Energy Exploration – Energy Select Sector SPDR Fund (XLE)
This is the most obvious choice. If oil price is staging an uptrend on reduced supplies, oil exploration and production stocks are sure to benefit as these companies will have a chance to pump more oil over the medium term.
Oilfield Services – VanEck Oil Services ETF (OIH)
Companies offering oilfield services, such as drilling, well completion, and maintenance, are also expected to witness increased demand. As oil producers ramp up their operations, they will require more services to optimize their production and operations.
Renewable Energy – iShares Global Clean Energy ETF (ICLN)
The renewable energy sector might also benefit indirectly from the oil price rally. As oil prices rise, there could be a stronger push towards alternative and cleaner energy sources (as investors would look for other alternatives), leading to increased investment in renewables. While renewable energy infrastructure was extremely costly before, the costs have declined a lot in recent times.
ETFs to Lose
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.
Energy Select Sector SPDR ETF (XLE): ETF Research Reports
SPDR S&P Retail ETF (XRT): ETF Research Reports
iShares Global Clean Energy ETF (ICLN): ETF Research Reports
VanEck Oil Services ETF (OIH): ETF Research Reports
U.S. Global Jets ETF (JETS): ETF Research Reports
VanEck Oil Refiners ETF (CRAK): ETF Research Reports
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