U.S. Markets open in 4 hrs 6 mins

Can Energy ETFs Rebound on Middle East Tension?

Sweta Killa
Is (TDS) Outperforming Other Utilities Stocks This Year?

Oil price is recoiling this month after ending a five-month streak of gains in February. This is especially true, as some positive sentiments have again started to build up in the oil market, which were under pressure from growing U.S. crude production (read: Oil Sees Strong Start to 2018 in 4 Years: ETFs to Play).

In fact, oil price climbed more than 2% in the last trading session buoyed by tensions in the Middle East and the possibility of further falls in Venezuelan output. A meeting between the Saudi crown prince Mohammed bin Salman and U.S. President Donald Trump early this week has raised speculation that the United States could re-impose sanctions on Iran following renewed criticism of the 2015 nuclear deal. The energy consultancy FGE expects the move to likely result in 250,000-500,000 barrels per day drop in its exports by this yearend.

Falling production in Venezuela, where output has been halved since 2005 to below 2 million barrels per day due to an economic crisis, will continue to support to oil price. Additionally, a weak dollar has made dollar-denominated crude cheap for foreign investors, potentially spurring demand.

Further, the historic output cut deal, wherein OPEC, Russia and other producers have agreed to curb production is now paying off with the global oil market on its way toward balancing. Moreover, the oil market is currently in a state of backwardation, where later-dated contracts are cheaper than near-term contracts, for months. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity (read: What Lies Ahead for Oil ETFs?).

However, surging U.S. crude production, which has risen by more than a fifth since mid-2016, to 10.38 million barrels per day, has been disrupting the oil demand/supply imbalance. While global demand is expected to pick up quickly this year, supply is also growing at a faster pace leading to a rise in inventories in the first quarter of 2018, per the International Energy Agency (IEA).

That said, investors having a strong stomach for risk and seeking to bet on oil on hopes of dwindling supply from the Middle East tension could consider any of ETFs from the long list below.

How to Play?

Investors seeking to deal directly in the futures market could look at United States Oil Fund USO and United States Brent Oil Fund BNO. While USO seeks to match the performance of the spot price of WTI, a direct exposure to the spot price of Brent crude oil is provided by BNO on a daily basis through future contracts. USO gained 2.1% following the Middle East tension news while BNO was up 1.8%.

For stock-loving investors, betting on energy stocks could be a solid idea. iShares U.S. Oil & Gas Exploration & Production ETF IEO gained the most, climbing 1.8% on the day, followed by gains of 1.6% for VanEck Vectors Unconventional Oil & Gas ETF FRAK and 1.5% for SPDR S&P Oil & Gas Exploration & Production ETF XOP. IEO offers exposure to U.S. companies that are engaged in the exploration, production and distribution of oil and gas while FRAK targets companies involved in the exploration, development, extraction and production of unconventional oil and natural gas. Meanwhile, XOP provides investors with exposure to the oil and gas exploration and production segment of the broad energy sector. All the three funds have a Zacks ETF Rank #3 (Hold) (read: Energy ETFs Fall on Dismal Exxon Mobil, Chevron Earnings).

Investors seeking to make outsized profits in a short span by taking higher risk could go for leveraged ETFs like Direxion Daily Energy Bull & 3x Shares ERX and Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares GUSH. While ERX creates a triple (3x or 300%) leveraged long position in the Energy Select Sector Index, GUSH offers triple exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. ERX added 2.7% while GUSH climbed 4.5% on the day.

However, investors should note that the leveraged products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing, when combined with leverage, may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Equity ETFs here).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>