Oil Spill, Offshore Drilling Put Related ETFs in Focus

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Includes: EVX, IEO, IEZ, PXE, USO, XOP
by: Tom Lydon

The oil leak in the Gulf of Mexico threatens to wreak environmental havoc, disrupt the local fishing industry and lead to yet more fallout. While this is a situation that needs to be resolved quickly, it may present an ETF opportunity as oil trades ever higher.

Oil-focused ETFs are moving higher today on reports that BP’s latest effort to contain the leak failed. Today, United States Oil Fund (NYSEArca: USO) is up about 1.5%; iShares Dow Jones US Oil & Gas Ex Index (NYSEArca: IEO) is up nearly 4%. Oil ministers foresee that demand for oil could push prices up past $85 now that the crisis in Greece is close to a resolution.

According to Kevin Grewal of Minyanville, two industries are cashing in on what could potentially be the worst environmental disaster in recent memory. Those two industries are the water-treatment and environmental-services industries, which provide detergents, emulsifiers and products that can dissipate oil and help contain its negative effects.

Three leaders in the effort to cleanup BP’s mess are Nalco Holding Co, Baker Hughes and Clean Harbor Inc. If you want to gain diversified exposure to companies like these, you can invest in the Market Vectors Environmental Services ETF (NYSEArca: EVX), which tracks 21 such companies.

Focusing directly on the oil services sector, there is mounting fear that the policy fallout will be detrimental to exploration and drilling. Fred Dickson of D.A. Davidson & Co. says he is concerned that Congress will overreact and implement ill-considered regulatory legislation, reports Josh Lipton of Minyanville.

Such legislation would include bans on offshore deep water drilling in previously approved regions, limiting current offshore drilling and increasing the costs of production.

More ominously for BP, Sen. Robert Mendez of New Jersey is trying to pass legislation that would increase BP’s liability from $75 million – the legal cap – to $10 billion. As such, Moody’s downgraded its outlook for Aa1 senior unsecured ratings from stable to negative.

But amidst the negative press, a Bank of America Merrill Lynch team of analysts, led by Doug Leggate, is optimistic that any added costs to exploration and drilling would not be a significant deterrent to oil companies.

iShares Dow Jones U.S. Oil & Gas Exploration Index (NYSEArca: IEO)

iShares Dow Jones U.S. Oil Equipment Index (NYSEArca: IEZ)

PowerShares Dynamic Energy Exploration & Production (NYSEArca: PXE)

SPDR S&P Oil & Gas Exploration & Production (NYSEArca: XOP)

Sumin Kim contributed to this article.