Although crude oil (WTI) is down from its recent high of almost $105 per barrel, even in the $90s, oil and fuel production will remain highly profitable for the energy sector. Several factors should support continued profits for energy companies.
Even as shipping through the Strait of Hormuz returns to normal levels, I expect oil prices to stay elevated. A recent Wall Street Journal article noted that a crude oil tanker shortage has driven shipping rates even higher. Tanker costs for different routes ranged from $100,000 to $150,000 in mid-July. Earnings for those routes are now $400,000 to almost $1 million. A million-dollar shipping charge works out to $26 per barrel. Oil producers will want to know they will be able to make a profit before contracting a crude oil tanker.
Upstream energy producers are very profitable with oil at $70. If the price stays in an $80 to $100 range, profits will be massive.
On the downstream end, refiners’ profits are at record levels and should stay high for the foreseeable future. Two factors are causing shortages of different fuel types, especially diesel and jet fuel. Producers are shipping oil out of the Persian Gulf, but since hostilities started, they have not shipped much refined product.
Also, the Ukrainian attacks on Russian refineries have forced Russia to keep its diesel fuel in-country, stopping exports. As a result, there is a global diesel shortage, which will keep prices high and refiner profits even higher.
With this energy-sector background, let’s look at a high-yield way to invest.
The State Street Select Sector SPDR ETFs hold stocks from one S&P 500 sector. The State Street Energy Select Sector SPDR® ETF (XLE) holds the stocks in the S&P energy sector.
About a year ago, State Street developed covered call funds for each of the Select Sector SPDRs. These ETFs own shares of the sector SPDRs and sell call options on those shares to generate cash flow to pay dividends.
The State Street Energy Select Sector SPDR® Premium Income ETF (XLEI) is the covered call ETF with XLE as the underlying asset. According to the State Street website, “The fund allows investors to seek exposure to firms in the Energy sector from oil, gas and consumable fuels, and energy equipment and services industries.”
XLEI pays monthly dividends and has a current indicative yield of 15.79%. The year-to-date total return is 30.58%, and the one-year return is 36.94%.
If you are looking for an income-focused way to play higher energy prices, check out XLEI.
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