For a considerable period of time, the energy sector was plagued by an abundant supply of oil. While major oil producing nations pumped oil, demand moved south on global economic sluggishness. However, disruptions in oil suppliers, including Nigeria and Canada, were more than welcome by the beleaguered energy sector. U.S. shale output is also likely to decline in June says the U.S. Energy Information Administration (EIA). These factors collectively helped U.S. crude price to reach a seven-month high on Tuesday and the Goldman Sachs Group, Inc. (NYSE:GS) to have a bullish outlook.
The banking behemoth went a step further saying that it expects crude demand to improve this year, which will further reduce the demand-supply disparity. Given these positive trends, investing in energy mutual funds won't be a bad proposition.
Nigerian Saboteurs, Canadian Wildfires
Supply outages in Nigeria along with wildfires in Canada continue to boost oil prices. In Nigeria, attacks by a militant group called Delta Avengers on oil installations led to shut down in production. Nigeria reduced its crude production to 1.69 million barrels per day (bpd), hitting its lowest level in 22 years. The group has recently bombed an offshore platform owned by Chevron Corporation (NYSE:CVX). Among the other attacks, this group targeted a series of refineries and an export terminal.
The Alberta region in Canada has, on the other hand, been under fire for two weeks now that is threatening major oil sands production facilities. According to the Conference Board of Canada, these facilities are estimated to produce 1.2 million barrels a day, which almost comprise $1 billion in economic activity.
Investors are also keeping an eye on other oil producing nations such as Venezuela and China. Venezuela is in the grip of a serious economic crisis. The country is currently operating under a "constitutional state of emergency," thanks to its high inflation rate and shortages in food and power. Meanwhile, China witnessed crude output of 4.04 million bpd in April this year, reflecting a 5.6% decline from the year-ago level.
Goldman Projects Deficit in Oil Market
Supply shortages mostly in Nigeria and Canada prompted Goldman Sachs to say that the oil market is facing a deficit in crude production. Goldman reversed its bearish bet and raised its oil price forecast for this year to $51 a barrel.
A few months ago, Goldman projected that oil prices would remain around $20 per barrel following crude oversupply. Goldman also said that "the oil market has gone from nearing storage saturation to being in deficit much earlier than" it anticipated.
U.S. Shale Oil Output Declines
According to the monthly report from the EIA, output from seven major U.S. shale plays is likely to fall by 113,000 bpd to 4.85 million bpd in June. The profitability of shale drillers has been seriously affected, leading to such a projection.
At the Eagle Ford shale play in South Texas, oil output is expected to witness the highest drop, down 58,000 barrels in June. The Bakken Shale play, which stretches from Canada into North Dakota and Montana, will experience the second largest decline in output, a projected fall of 28,000 bpd, the report mentioned.
Top 4 Energy Mutual Funds to Invest In
Oversupply of oil has always been a major concern for energy companies. But, as mentioned above, supply side disruptions have helped oil prices gain momentum. Demand, on the other hand, is expected to gain traction. Goldman projects 2016 worldwide crude demand to improve by 1.4 million bpd, which is higher than its prior expectation. This will further bridge the gap between supply and demand.
Banking on these bullish trends, it will be judicious to invest in mutual funds that have considerable exposure to the energy sector. We have selected four such energy mutual funds that have given impressive year-to-date returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $2,500 and carry a low expense ratio.
Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify the portfolio without the numerous commission charges that stocks need to bear.
Fidelity Advisor Energy Fund A (MUTF:FANAX) invests a major portion of its assets in securities of companies engaged in the energy field, including the conventional areas of oil, gas, electricity and coal. FANAX's year-to-date return is 12.5%. Annual expense ratio of 1.11% is lower than the category average of 1.47%. FANAX has a Zacks Mutual Fund Rank #2.
Guinness Atkinson Global Energy Fund (MUTF:GAGEX) invests the majority of its assets in equity securities of both U.S. and non-U.S. companies engaged in the production, exploration or discovery, or distribution of energy. GAGEX's year-to-date return is 12.1%. Annual expense ratio of 1.41% is lower than the category average of 1.47%. GAGEX has a Zacks Mutual Fund Rank #2.
Vanguard Energy Fund (MUTF:VGENX) invests a large portion of its assets in the common stocks of companies involved in activities in the energy industry, such as the exploration, production and transmission of energy or energy fuels. VGENX's year-to-date return is 16.4%. Annual expense ratio of 0.37% is lower than the category average of 1.47%. VGENX has a Zacks Mutual Fund Rank #1.
Fidelity Select Energy Service Portfolio (MUTF:FSESX) invests a major portion of its assets in securities of companies engaged in the energy service field, including those that provide services and equipment to the conventional areas of oil, gas, electricity, and coal. FSESX's year-to-date return is 5.1%. Annual expense ratio of 0.81% is lower than the category average of 1.47%. FSESX has a Zacks Mutual Fund Rank #2.