Energy ETFs: A Bright Spot Amid Volatility

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Oil price jumped to the highest in six weeks buoyed by signs of tightening supply, following a bigger-than-expected decline in crude stockpiles and expectations of an increase in demand as vaccination roll-outs widen. Brent oil advanced to above $75 per barrel while U.S. crude climbed to above $72.61 per barrel. Brent hit its highest levels since late July and WTI since early August.

Supply Tightening

Oil drillers in the Gulf of Mexico are still struggling to restore output more than two weeks after Hurricane Ida made landfall on the coast of Louisiana, with almost a third of production still idled. According to the Bureau of Safety and Environmental Enforcement. 36 platforms out of 560 operators are still closed, resulting in a loss of production of about half a million barrels of oil. In fact, overall output loss has risen to 27.3 million barrels since the storm hit, making Ida the most damaging to oil production in 13 years.

Amid the supply crunch, another heavy storm — Nicholas — raised concerns over more supply disruptions in the U.S. Gulf region and Texas. The International Energy Agency has warned that the recent supply lost from storms in the U.S. Gulf have offset the output raises by OPEC and its allies. The OPEC and its allies agreed to stick to their existing policy of gradual oil output increases in the latest meeting.

The latest report of the Energy Information Administration (EIA) shows that stockpiles fell by 6.4 million barrels in the week ending Sep 10 to their lowest since September 2019 and the drop was more than twice the consensus market forecast.

Demand Improving

With new vaccination mandates to control the rising Delta variant of COVID-19, demand is poised to increase. Additionally, OPEC+ in its latest monthly report forecasts oil demand to grow by 4.15 million barrels per day in 2022, up from the previous forecast of 3.28 million barrels per day. It also projects demand to reach 100.83 million barrels per day for the year, driven by a stronger-than-expected recovery in fuel demand and a steady economic outlook in all regions. The OPEC monthly report further states that the world will continue to face a supply deficit in the coming months even as OPEC nations revive idle production.

Given the demand and supply imbalances, the oil price has shown strength since late August. The solid trend is likely to continue with major Wall Street banks being bullish on the commodity at least for the short term. Goldman Sachs Group (GS Quick Quote GS - Free Report) said oil will likely lead a rally in commodities next quarter amid strong demand and “growing scarcity” of supply. Bank of America Corp. (BAC Quick Quote BAC - Free Report) estimates that a colder-than-expected winter could push prices up toward $100 at some point early next year.

ETFs in Focus

Amid rising oil prices, the energy sector has been enjoying a strong rally lately. We have highlighted five ETFs that have been showing solid momentum in the space, gaining at least 8% over the past week, and will continue to outperform in the weeks ahead given the bullish fundamentals:

Invesco DWA Energy Momentum ETF (PXI Quick Quote PXI - Free Report)

This fund tracks the Dorsey Wright Energy Technical Leaders Index, which is designed to identify companies that are showing relative strength (momentum). It charges 60 bps in annual fees and trades in a good volume of 148,000 shares a day on average. The fund has 37 stocks in its basket with AUM of $69.7 million. It has a Zacks ETF Rank #3 (Hold) with a High-risk outlook.

First Trust ISE-Revere Natural Gas Index Fund (FCG Quick Quote FCG - Free Report)

This fund offers exposure to U.S. companies involved in the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 38 stocks in its basket. The fund has amassed $263.1 million in its asset base while charging 60 bps in annual fees. Volume is solid with 1.3 million shares exchanged per day on average. The product has a Zacks ETF Rank #2 (Buy) with a High risk outlook.

VanEck Vectors Oil Services ETF (OIH Quick Quote OIH - Free Report)

This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services, or oil drilling. With AUM of $2.4 billion, it holds 25 stocks in its basket and charges 35 bps in annual fees. The product has a Zacks ETF Rank #3 with a High-risk outlook.

SPDR S&P Oil & Gas Exploration & Production ETF (XOP Quick Quote XOP - Free Report)

This fund provides exposure to 54 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $2.9 billion in its base and trades in an average daily volume of 7.3 million shares. The ETF charges 35 bps in fees per year and has a Zacks ETF Rank #3 with a High-risk outlook.

Invesco Dynamic Energy Exploration & Production ETF (PXE Quick Quote PXE - Free Report)

This product follows the Dynamic Energy Exploration & Production Intellidex Index, which thoroughly evaluates companies involved in the exploration and production of natural resources used to produce energy based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action, and value. Holding 32 stocks in its basket, the fund has amassed $78.2 million in its asset base while trading in an average daily volume of 50,000 shares. It charges 63 bps in annual fees and has a Zacks ETF Rank #3 with a High-risk outlook.

Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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