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ETFs Set to Benefit/Lose From Higher Brent Prices

Sweta Killa
Based on solid Q3 earnings, investors might want to tap energy ETFs having the largest allocation to these behemoths.

Oil price rallied with global benchmark Brent breaching $82 per barrel, the highest since November 2014. The increase came after Saudi Arabia and Russia refused to increase production to offset falling Iranian oil exports in a meeting in Algiers on Sep 23.

The United States is expected to re-impose sanctions on Iran starting Nov 4. Since Iran is OPEC's third-largest oil producer and exports about 2.5 million barrels a day, renewed sanctions will reduce Iranian oil exports, further tightening global supplies and pushing oil prices higher. An analyst at J.P. Morgan (JPM) expects that the sanctions will cut Iran’s oil exports by 1.5 million barrels per day while RBC Capital Markets expects losses related to Iranian oil to exceed 1.2 million barrels per day in the first quarter of 2019.

Additionally, falling oil production in Venezuela is supporting higher oil price. This is especially true as Venezuela’s worsening economic crisis has forced the country to curtail its output to far below 2 million barrels per day, which has been halved since 2005 (read: Trump Slaps $200B in China Tariffs: ETFs in Focus).

Further, hedge funds and other money managers raised their bullish bets on Brent in three consecutive weeks, extending their net long position in Brent by 23 million barrels to 440 million barrels, up to Sep 11, according to the data compiled by Reuters. Notably, Brent crude is on track for its fifth consecutive quarterly increase -- the longest such stretch for the global benchmark since early 2007.

Given bullish fundamentals, JP Morgan raised its Brent crude forecast to $85 per barrel over the next six months from the previous forecast in the low $60. The price can also spike to $90 in the wake of reduced Iranian oil exports.

However, escalating US-China trade war fears, ongoing emerging market crisis and weakening currencies in major Asian oil importers like India will dent global demand in the coming months, thereby capping the oil price rise (read: India ETFs: Proof to EM Shocks, What About Oil Shocks?).

Further, the return of Libya’s supply in August that has led to highest OPEC production this year added to woes. Libya’s production, which was under pressure from attacks and shutdown of oil facilities, climbed to the highest level since 2013 in August. The output is expected to rise even further if security at the nation’s energy facilities can be improved, according to the chairman of the state-run National Oil Corporation.

Higher Oil Price: A Boon or Bane?

Higher oil price is a boon for energy stocks, especially producers and explorers, which derive most of their revenues from selling the crude that they extract. This is because the cost of oil production or extraction remains low as companies look to lock in supply contracts at higher prices. The gap between production cost and selling price keeps on rising when oil price surges even higher, leading to fat profit margins and thus pushes up a company’s share price.

While almost every corner of the energy segment is shining, oil refiners might be hit. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, higher oil prices would crimp margins for refiners, leading to weak stock prices.

Further, higher oil price increase gasoline and jet prices. The resultant inflationary pressure will raise the price of products, leading to reduced consumer spending, which accounts for more than two-thirds of the U.S. economic activity. The discretionary and retail sectors will thus bear the brunt (read: August Wage Growth Hits 9-Year High: ETFs & Stocks to Surge).

Given this, we have highlighted ETFs that are expected to gain/lose from higher oil price:

ETFs to Gain

VanEck Vectors Oil Services ETF OIH

This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to the companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $1.2 billion, it holds 25 stocks in its basket and charges 35 bps in annual fees. The product has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

SPDR S&P Oil & Gas Exploration & Production ETF XOP

This fund provides exposure to the oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $3.4 billion and holds 73 securities in its basket. The product charges 35 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.

ETFs to Lose

U.S. Global Jets ETF JETS

This pure play ETF provides exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product holds 34 securities. The fund has gathered $102.5 million in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: How to Prepare for Hurricane Season With ETFs & Stocks).

VanEck Vectors Oil Refiners ETF CRAK

With AUM of $62.4 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, holding 25 stocks. The product charges 59 bps in annual fees.


XRT targets the retail sector and tracks the S&P Retail Select Industry Index. It is home to 96 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $746.5 million and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

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