Crude Output Control Speculation Resurfaces: 4 ETFs To Watch

|
Includes: IYE, OIH, VDE, XOP
by: Zacks Funds

After a failed initiative in April, major oil producers are speculated to take another shot at controlling crude production in late September. This led crude prices to register healthy gains on Monday. Moreover, a bright outlook on oil demand in the second half of this year had a positive impact on oil prices.

Rising Output Control Possibilities

According to a report published in The Wall Street Journal, major producers may consider cutting output to tackle weak global demand and low oil prices. Separately, the president of the Organization of the Petroleum Exporting Countries (OPEC), Dr. Mohammed bin Saleh Al Sada, who is also the Minister of Energy and Industry of Qatar, indicated that OPEC members and non-OPEC major oil producers, including Russia, may informally meet at the International Energy Forum in Algeria in late September to work out crude production control.

Dr. Al Sada said: "OPEC continues to monitor developments closely, and is in constant deliberations with all member states on ways and means to help restore stability and order to the oil market." Russia declined the possibility but hinted at participating in the discussion if prices decline. Russia's Energy Minister Alexander Novak said: "A basis for this has yet to develop, considering prices are still at more or less normal levels… If prices will fall then that necessity will most likely arise."

Bright Outlook for Second Half

Dr. Al Sada indicated that the oil market will witness a favorable demand-supply condition in the second half of this year on the back of a rebound in global oil demand and controlled output. Moreover, he said that the recent decline in oil prices is short lived and that a steady increase is likely in the second half.

Dr. Al Sada added: "Expectation of higher crude oil demand in third and fourth quarters of 2016, coupled with decrease in availability, is leading the analysts to conclude that the current bear market is only temporary and oil price would increase during later part of 2016."

Separately, the recently released U.S. Energy Information Administration (EIA) report showed that crude output in the U.S. dropped for the first time in four weeks by 55,000 barrels per day (bpd) to 8,460,000 bpd for the week ending July 29. The output also plunged around 10.6% from the year-ago level.

Headwinds Remain

While investors are already concerned about crude oversupply, record oil export from China added to the worries. Data released by China's General Administration of Customs showed that oil export jumped 52.3% year over year in July to a record level of 4.57 million tons. On the other hand, weak demand led China's imports to slump 13% from the year-ago level to 2.08 million tons.

Also, Baker Hughes (NYSE:BHI) reported that the oil rig count in the U.S. rose for the sixth straight week in the week ending Aug. 5. The rig count increased by seven units to 381 for the week. Moreover, EIA reported last week that crude inventories increased to 1.4 million barrels for the week ending Aug. 3, preceded by an increase of 1.7 million barrels in the week before.

ETFs in Focus

Renewed possibilities of crude production control boosted prices of WTI and Brent crude oil. While WTI crude increased 2.8% to $43.02 per barrel on Monday, Brent crude rose 2.5% to $45.39 a barrel. If Dr. Al Sada's anticipation on the oil market for the second half of this year proves right, then the energy sector should see gains in the coming days. We have highlighted four energy ETFs that may benefit from this encouraging backdrop.

Vanguard Energy ETF (NYSEARCA:VDE)

This fund manages over $3.9 billion in asset base and provides exposure to a basket of 138 energy stocks by tracking the MSCI US Investable Market Energy 25/50 Index. The product sees solid volume of about 366,000 shares and charges 10 bps in annual fees. Though the product is skewed toward the integrated oil and gas sector, with 39.7% of assets in oil exploration and production, and oil equipment services having a nice mix in the portfolio with double-digit exposure each. This Zacks ETF Rank #3 (Hold) fund gained 6.3% and 14.3% over the three-month and year-to-date periods, respectively.

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

The fund follows the S&P Oil & Gas Exploration & Production Select Industry Index, holding 60 stocks in its basket. In terms of industrial exposure, oil and gas exploration and production accounts for nearly 76.8% of the portfolio while oil and gas refining and marketing takes the next spot with 17.4% allocation. The product charges 35 bps in annual fees and trades in solid volume of about 18 million shares. This popular ETF has accumulated $1.7 billion in its asset base.This Zacks ETF Rank #3 fund gained 9.7% and 18.4% over the three-month and year-to-date periods, respectively.

iShares US Energy (NYSEARCA:IYE)

This ETF tracks the Dow Jones U.S. Oil & Gas Index, giving investors exposure to the broad energy space. It holds 78 stocks in its basket with AUM of $1.2 billion and average daily volume of more than 1.6 million shares. The product charges 43 bps in fees per year from investors. From a sector perspective, integrated oil and gas makes up for 42.7% share while oil exploration and production and oil equipment and services round off the next two spots with a double-digit exposure each. This Zacks ETF Rank #3 fund gained 5.6% and 12.5% over the three-month and year-to-date periods, respectively.

VanEck Vectors Oil Services ETF (NYSEARCA:OIH)

The fund follows the MVIS U.S. Listed Oil Services 25 Index, holding 26 stocks in its basket. In terms of industrial exposure, energy equipment and services for nearly 77% of the portfolio while oil and gas drilling takes the remainder. The product charges 35 bps in annual fees and trades in solid volume of about 6 million shares. The ETF has accumulated $767.6 million in its asset base. This Zacks ETF Rank #3 fund gained 8.6% and 9.5% over the three-month and year-to-date periods, respectively.

Original Post