Why Oil & Gas ETFs Are Surging Again


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Oil prices have been surging over the past few weeks, driven mainly by supply disruptions and rising demand. Brent crude prices topped $85 per barrel last week, for the first time since late 2014, and up about 125% from the end of last October. Per WSJ, many traders are again betting that crude would top $100 a barrel by the year-end.

Demand for oil has been rising as economies around the world are reopening after many months of pandemic-induced lockdowns. Per International Energy Agency, demand will continue rise at least through 2026.

In general, investments in oil and natural gas have been declining as governments and investors prefer clean/green energy. 

Production cuts by the OPEC have further boosted prices, and while the cartel and its partners will raise production in the coming months, the output would likely still stay short of rising demand. And transition to green energy would take many years.

Natural gas prices have been on a wild ride, particularly in Europe, as declining production left the continent heavily dependent on imports from Russia. Prices had soared to almost 10 times their level from the start of this year recently but reversed course after Russian President Putin said that Moscow was a reliable supplier and would work to help Europe avoid an energy crisis.

Insane surge in natural gas prices could result in use of oil as an alternative in some power plants according to analysts. That could additionally boost the demand for oil in the longer term.

ETFs like the United States Oil Fund (USO - Free Report) that bet on oil prices using futures contacts and other derivatives are very volatile and therefore suitable only for short term trading or hedging.  Leveraged products like the MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report) have become very popular with day traders but they could also be very volatile.

On the other hand, unleveraged ETFs that invest in shares of energy companies are relatively stable and driven mainly by fundamentals.

The Energy Select Sector SPDR Fund (XLE - Free Report), the largest energy ETF, is market-cap weighted. Chevron (CVX - Free Report) and Exxon Mobil (XOM - Free Report) are its top holdings.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) tracks an equal-weighted index of oil & gas companies. The Invesco Dynamic Energy Exploration & Production ETF (PXI - Free Report) is a price momentum weighted ETF and one of the best performers in the space over the past year.

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