ETFs To Gain & Lose From Higher Oil Price

Oil prices have been on a surge in recent months on geopolitical tensions in the Middle East and Ukraine, tightening supply conditions, and the prospect of higher demand. Global benchmark Brent climbed above $91 to near the highest level since October, while U.S. crude rose closer to $87.

The tensions in the Middle East have escalated following the airstrike on Iran's embassy compound in Syria, which killed several individuals, including two generals. Iran has vowed a "decisive response" to the attack, sparking fears of a wider regional conflict. Meanwhile, a report showed that Russia may have temporarily lost as much as 15% of its refining capacity because of Ukrainian drone attacks. The escalating tensions have led to a spike in oil prices.

Additionally, buyers from Europe and Asia are increasingly purchasing U.S. crude, driven by concerns over importing Russia and Venezuela oil amid sanctions against Russia and the unpredictable status of sanctions relief for Venezuela. Further, the oil cartel OPEC+ extended the voluntary output reductions of 2.2 million barrels per day until the second quarter (read: 4 Reasons Why Oil & Energy ETFs Can Continue to Soar).

Meanwhile, the demand for oil is improving. The IEA revised its 2024 oil demand outlook upward for the fourth time since  November, citing disruptions in Red Sea shipping due to Houthi attacks. The forecast indicates an increase in global demand by 110,000 bpd from the previous projection to 1.3 million bpd. The improved forecast came from signs of economic growth in China and the United States. Notably, manufacturing activity in China expanded for the first time in six months in March, bolstering oil demand in the world's largest importer of crude. In the United States, manufacturing activity unexpectedly expanded in March for the first time since September 2022.

Oil is also gaining support from declining crude exports from Saudi Arabia and Iraq. Further, the prospect of rate cuts this year by the Fed is driving oil prices. Lower interest rates tend to lower the expenses of purchasing goods and services, potentially stimulating economic expansion and driving oil demand.

 

Higher Oil Price: A Boon or Bane?

Higher oil prices are a boon to energy stocks, especially producers and explorers who derive most of their revenues from selling the crude they extract. This is because the cost of oil production or extraction remains low as companies look to lock in supply contracts at higher prices. The gap between production cost and selling price keeps rising when oil price surges, leading to fat profit margins and thus pushing up a company’s share price. The oil-producing nations receive a boost from the same.

Additionally, higher oil prices incentivize consumers to consider electric vehicles as an alternative to traditional gasoline-powered cars. Electric vehicle manufacturers may experience a boost in demand as environmentally conscious consumers seek energy-efficient transportation options.

While almost every corner of the energy segment is shining, oil refiners might be hit. This is because players in this industry use oil as an input for processing refined petroleum products. Hence, higher oil prices crimp margins for refiners, leading to weak stock prices. Further, higher oil prices increase gasoline and jet prices. The resultant inflationary pressure will raise the price of products, leading to reduced consumer spending, which accounts for more than two-thirds of U.S. economic activity. The discretionary and retail sectors will thus bear the brunt.

Apart from these, a higher oil price is a major threat to oil-consuming nations like India, Turkey and South Africa. After all, higher oil prices restrict tax revenues or GDP growth opportunities in big oil-importing countries. This is because imports become more expensive and exports turn less valuable, resulting in a deterioration in the balance of payments, lower output, and an increase in inflation and unemployment rates in these countries. All these will thwart overall economic growth.   

Given this, we have highlighted ETFs that are expected to benefit/lose from higher oil prices.

 

ETFs to Benefit

 

VanEck Vectors Oil Services ETF (OIH)

VanEck Vectors Oil Services ETF 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. It holds 26 stocks in its basket.

With an AUM of $2.3 billion, VanEck Vectors Oil Services ETF charges 35 bps in annual fees. The product trades in an average daily volume of 387,000 shares and has a Zacks ETF Rank #2 (Buy), with a High risk outlook.

 

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

SPDR S&P Oil & Gas Exploration & Production ETF provides exposure to 52 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It is widely spread out across components, with each accounting for less than a 3% share.

SPDR S&P Oil & Gas Exploration & Production ETF has accumulated $4.2 billion in its base and trades in an average daily volume of 3 million shares. The ETF charges 35 bps in fees per year and has a Zacks ETF Rank #3 (Hold), with a High risk outlook.

 

Global X Autonomous & Electric Vehicles ETF (DRIV)

Global X Autonomous & Electric Vehicles ETF seeks to invest in companies involved in the development of autonomous vehicle technology, electric vehicles (“EVs”), and EV components and materials. It follows the Solactive Autonomous & Electric Vehicles Index and holds 75 stocks in its basket. Global X Autonomous & Electric Vehicles ETF has key holdings in consumer discretionary and information technology with 36.1% and 29.4% share, respectively.

With an AUM of $597.5 million, Global X Autonomous & Electric Vehicles ETF charges 68 bps in fees per year and trades in an average daily volume of 132,000 shares.

 

ETFs to Lose

 

U.S. Global Jets ETF (JETS)

U.S. Global Jets ETF provides pure-play exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product holds 57 securities.

U.S. Global Jets ETF has an AUM of $1.3 billion in its asset base. It charges investors 60 bps in annual fees. It trades in an average daily volume of 3.5 million shares and has a Zacks ETF Rank #3, with a High risk outlook.

 

SPDR S&P Retail ETF (XRT)

SPDR S&P Retail ETF tracks the S&P Retail Select Industry Index, which provides exposure across large, mid and small-cap retail stocks. It holds 79 well-diversified stocks in its basket. SPDR S&P Retail ETF is well-spread across various industries, with a double-digit allocation each in apparel retail, automotive retail, specialty stores and broadline retail.

SPDR S&P Retail ETF is the largest and most popular in the retail space, with an AUM of $480.6 million and an average trading volume of 7 million shares. It charges 35 bps in annual fees and has a Zacks ETF Rank #2 (Buy), with a Medium risk outlook.

 

iShares India 50 ETF (INDY)

iShares India 50 ETF provides exposure to the largest Indian stocks by tracking the Nifty 50 Index. It holds 50 stocks in its basket, with none accounting for more than 11.6% of assets. iShares India 50 ETF has key holdings in financials, information technology and energy.

iShares India 50 ETF has managed assets worth $868.6 million and is a high-cost choice in the space, charging 89 bps in annual fees. INDY trades in an average daily volume of 88,000 sh


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