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OPEC ETFs Crushed by Oil Crash: What Next?

Zacks Equity Research

Among various other reasons, the oil crash probably traumatized the global economy the most in the second half of this year. Sluggish demand thanks to a soft macroeconomic backdrop in some developed regions including the Euro zone and China, booming oil production resulting in abundant supply, price war induced by OPEC nations and a strengthening dollar caused this debacle (read: 3 Energy ETFs Hit the Most by OPEC's 'No Cut' Decision).

Moreover, the Organization of Petroleum Exporting Countries’ (:OPEC) latest decision not to reduce oil production in spite of spilling-over supplies, oil has crumpled to a bear market. West Texas Intermediate (WTI) crude is presently trading around $65 a barrel – almost a five-and-half year low level.

Brent price hovered around $70 per barrel as of December 4, 2014. In fact, OPEC’s no output cut decision led to an 18% slump in oil prices in November, indicating the acutest monthly loss since in about six years. This was in stark contrast to the triple-digit mark oil price hit in early 2014 (read: Best and Worst Performing ETFs of November).

Can the Price Rebound?

While all was not well for oil and OPEC regions have no intention of cutting inventory, the U.S. Energy Department's weekly inventory release has shown a glimmer of hope lately. The federal government’s EIA report indicated that crude inventories recorded a surprise drop by 3.69 million barrels for the week ending November 28, 2014.

The latest followed a rise of 1.95 million barrels in the preceding week. If this momentum continues and EIA keeps reporting such downbeat production data, we might see a needed rebound in the oil price.

Quite expectedly, the oil downfall spread horror among several assets classes and investing products related to the oil price. Among these, OPEC nations need special mention.

OPEC ETFs in Focus 

Oil rich OPEC nations are presently left panting. Apparently, to channelize huge inventories, many OPEC nations got into a price war with Saudi being the latest to offer the U.S. and Asia oil at a discount. As a result, ETFs belonging to OPEC nations have had a blood bath these days.
MSCI UAE Capped ETF (UAE) was down 16.2% in the last 26 weeks and MSCI Qatar Capped ETF (QAT) has lost about 6% during the same time frame. Market Vectors Gulf States Index ETF (MES) which is heavy on UAE (34.65), Qatar (25%) and Kuwait (23.1%) has retreated about 15% in the last 26 weeks. MSCI Frontier 100 Index Fund (FM) was down about 11% during this phase thanks to its tilt toward Kuwait (25.2%) and Nigeria (13.2%) (read: 3 Best Performing ETFs of the Third Quarter).

However, the situation is still under control for these OPEC players as Kuwait, Qatar and UAE require the breakeven oil price to be $75, $71 and $80 a barrel, per Forbes. Another research house, projected the 2014 fiscal breakeven oil price (the price which is required to make oil revenues at par with spending obligations) for Iraq, Kuwait, Qatar, Saudi and UAE at $111, $54, $55, $98 and $79 respectively.

But, we wonder whether these nations can survive the oil collapse for long. This was truer with Saudi Arabia, which is the topper among the 12 OPEC members in terms of production, cutting its January oil prices for Asia and the U.S. Analysts presume that this could be a strategic move by Saudi Arabia to have command over the U.S. shale boom.

Bottom Line

In such a situation, investors skittish about the future course of oil prices should stave off their OPEC ETF exposure. Several analysts project that oil prices may fall further before rebounding. However, investors should simultaneously note that after being thrashed in recent times, these OPEC ETFs are presently trading at sub-par valuations.

UAE, QAT are trading at P/E (ttm) of 15 while MES and FM are trading at P/E (ttm) of 14 and 12, respectively. This was in contrast to the P/E (ttm) multiple of 18 possessed by SPY. So, investors having a strong stomach for risks may consider this slump as an entry point to the OPEC ETFs. To do this, investors may take a look at the breakeven price variance among the OPEC nations. As of now, Qatar ETF (QAT) looks less ruffled thanks to its maximum resistance to the oil price slide.

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