Should You Buy Oil & Gas ETFs Now?

Pump Jack, Oilfield, Oil, Fuel, Industry, Petroleum

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Oil & gas ETFs, which are among the areas hardest hit by the pandemic, have rebounded strongly over the past month, thanks mainly to very encouraging vaccine news from Pfizer (PFE), Moderna (MRNA) and AstraZeneca (AZN).


Oil prices also got a boost from expectations that OPEC and its allies would extend the current production cuts. The group recently agreed to increase production by 500,000 barrels per day beginning in January. Since investors were extremely bearish on the sector and the sell-off was probably overdone, the rebound last month was quite impressive.

The recent pace of recovery may not continue in the coming months. Wide rollout of vaccines is still months away and if COVID infections continue to surge at the current pace, we may see renewed lockdowns resulting in downward pressure on oil again.

While widespread vaccination would be a game-changer for the industry, the global oil demand is likely to stay well below pre-pandemic levels as some of the recent trends would become permanent.  

The Biden administration is expected to encourage a transition to cleaner energy, and some of the oil majors have stated investing more in renewables to prepare for a low carbon future.

ETFs that bet on oil prices using futures contacts and other derivatives are very volatile and therefore suitable only for short term trading or hedging. On the other hand, ETFs that invest in shares of energy companies are relatively stable and driven mainly by fundamentals.

The United States Oil Fund (USO) holds short-term futures contracts on WTI crude. The Energy Select Sector SPDR Fund (XLE), the largest energy ETF, is market -cap weighted. Chevron (CVX) and Exxon Mobil (XOM) are its top holdings.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) tracks an equal-weighted index of oil & gas exploration & production companies. To learn more about these ETFs, please watch the short video above.

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