For the past several weeks developments in the Middle East have dominated not only the headlines but controlled the attention of investors as well. Starting with Tunisia and Egypt, numerous countries have staged democratic movements with varying degrees of success and violence. Though Egyptians forced long-time president Hosni Mubarak to relinquish his position and flee the country in a relatively peaceful coup, other conflicts have lasted for weeks and show no signs of coming to a peaceful conclusion. The protests have ensued for well over a month now, and have put global markets in a choke-hold as investors worry about both the direct economic impact and the repercussions of volatile and elevated oil prices.
The matter at hand is of a major concern to the oil industry. The Middle East holds the vast majority of the world’s oil reserves, and with a lack of stable political systems production has slowed considerably since the riots and protests began. Particularly, the unrest in Libya has been contributing to surging oil prices, which jumped close to 10% from February 1st to March 1st. Libya currently sits in 10th place for proven global oil reserves, as the small nation holds approximately 3.24% of the world’s oil reserves (just over 46 billion barrels). Specifically, Libya produces vast amounts of “light sweet crude” which is superior in many ways to the typical Middle Eastern product. Light sweet crude is most often used in diesel fuel, which is incredibly popular in the European region.
The protests overseas bring up yet again a major issue that has been at the back of the mind of investors and economists for quite some time: global dependence on Middle Eastern oil reserves. As oil prices continue to surge this dependence has become more apparent, and energy expenses have emerged as yet another hurdle to a still fragile economic recovery. A rise in oil prices can hurt economies all across the board; transportation costs rise, and even simple processes such as making plastic becomes more expensive. But while oil prices means trouble for many equities, it creates opportunities for others.
Rising oil prices obviously benefit major oil companies like Exxon Mobil (XOM), or Royal Dutch Shell (RDS.A), and the members of the Energy Equities ETFdb Categories have all turned in stellar performances in recent weeks. But it can also mean good news for sectors such as alternative energy and inflation protected investments. From a more general standpoint, rising oil prices will mean good news for some countries, but bad for others. With proven oil fields being focused to very specific areas of the globe, there are several countries that will reap the rewards of the current spike in oil prices. Below, we outline three countries, and their respective ETFs, that could benefit from a triple digit oil price.
When it comes to oil exports, Russia is only second to Saudi Arabia–and by a slim margin. According to the Energy Information Administration, the next closest exporting country is roughly 5 million barrels per day behind Russia. On top of that, Russia is the top oil producing nation in the world, making it one of the few nations to actually enjoy a sharp spike in oil prices; the world’s largest country produced an average of just over 10 million barrels per day in 2010. Oil production in Russia accounts for just under 15% of the entire nation’s GDP, a surprisingly high figure. With oil prices spiking, and production and exportation taking a major hit in the Middle East, the majority of the world, and Europe especially, will likely turn to Russia for their oil supplies for the time being.
Hefty Russian supplies and skyrocketing oil prices could translate into strong gains for the Market Vectors Russia ETF (RSX). This ETF provides exposure to publicly traded companies that are domiciled in Russia of that conduct significant business in the country. The ETF is made up of numerous energy companies, including the fossil fuel giant Gazprom, which makes up roughly 7.7% of RSX. From a sector standpoint, this ETF is dominated by energy, which accounts for close to 40% of the fund’s assets. With such heavy allocations to the energy sector, RSX stands to gain a substantial amount if oil prices continue their trend and Middle East production remains low.
Canada has long been known as a commodity-rich nation, and is home to the third largest oil reserves in the globe. Our neighbors to the north have long been a global force in the crude industry; from a net export standpoint, Canada ranks 14th in the world, putting out an average of 1.1 million barrels per day in 2009. From a production standpoint, Canada ranks fourth in the world, producing approximately 4 million barrels on a daily basis last year. As far as the U.S. in concerned, it is no secret that the we are the largest consumer of oil in the world, and Canada ranks number one on the U.S. import list for crude oil. Rising prices and the crude-thirsty U.S. economy could turn Canadian oil exports into a goldmine.
There are currently close to 200 ETFs that include exposure to Canadian equities, but the most popular pure play option is the iShares MSCI Canada Index Fund (EWC). From a sector standpoint, energy accounts for 25% of the entire ETF, with the top holdings featuring major players in Canadian energy such as Suncor Energy (SU) [5%] and Canadian Natural Resources (CNQ) [3.7%].
Another increasingly popular option is the IndexIQ Canada Small Cap ETF (CNDA), which allocates over half of its holdings to the basic materials sector and about 20% to energy companies.
Though Norway is the smallest country by far on this list, it accounts for a substantial amount of global oil supply. The country was the fifth largest oil exporter in 2009, sending out approximately 2.1 million barrels on a daily basis. As far as oil production is concerned, Norway ranks 11th among its global competitors, making it a force to be reckoned with in the crude sector. The top importers of Norway’s robust exports are as follows: Sweden (41%), Denmark (21%), the UK (12%), Ireland (9%), and the Netherlands (6%). Because Norway provides massive amount of oil to some of Europe’s superpowers, a triple digit price for crude will boost profits handsomely.
There is currently one ETF that allocates all of its assets to Norwegian equities: the Global X FTSE Norway 30 ETF (NORW). The ETF is heavily focused on the energy sector, which represents just under 30% of the entire fund. NORW’s top holding is Statoil ASA (STO) [15.8%], the energy company that is 67% government owned and that accounts for 80% of the nation’s oil and gas production. This may be a good fund for investors looking to make a play on European oil consumption and production, as this country represents one of the strongest crude producers in the region.
Disclosure: No positions at time of writing.
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