Energy ETFs rally on OPEC production cuts

Dec 11th, 2019 | By | Category: Equities

Energy-related equity ETFs have recorded impressive performance recently with several funds delivering returns above 8% over the past week.

Energy ETFs rally on OPEC production cuts

ETFs providing exposure to oil and gas companies have delivered returns in excess of 8% over the past week.

The rally comes off the back of higher oil prices which have been trending upwards following the announcement of production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and allied oil producers.

The energy sector of the US stock market, as represented by the SPDR Energy Select Sector Fund (XLE US), rose 3.1% over the week ending 10 December 2019, surpassing the 1.3% return of the SPDR S&P 500 ETF (SPY US).

The real standout performers, however, have been ETFs targeting companies operating in the oil and gas industries, with the First Trust Natural Gas ETF (FCG US) leading the charge with a return of 9.9%.

This fund, which houses $80 million in assets under management and comes with an expense ratio of 0.60%, is linked to the ISE-Revere Natural Gas Index. The index includes US-listed large and mid-cap common stocks, as well as master limited partnerships (MLPs), that are focused on the exploration and production of oil and natural gas.

The Invesco S&P SmallCap Energy ETF (PSCE US) posted a similar stellar return of 9.7%, highlighting the gains that smaller-cap oil and gas companies have also made over the past week. The underlying S&P SmallCap 600 Capped Energy Index consists of stocks from the small-cap S&P 600 Index that are classified in the GICS energy sector. The fund has $25m in AUM and comes with an expense ratio of 0.29%.

The SPDR S&P Oil & Gas Equipment & Services ETF (XES US) also delivered a notably outsized performance with a return of 9.4%. The underlying S&P Oil & Gas Equipment & Services Select Industry Index employs a modified equal-weighted methodology which also increases the relative impact of smaller-cap firms on performance compared to traditional market cap-weighted approaches. The fund houses $170m AUM and comes with an expense ratio of 0.35%.

Other ETFs with impressive one-week performance figures include the Invesco Dynamic Oil & Gas Services ETF (PXJ US), which gained 8.4%; the VanEck Vectors Oil Services ETF (OIH US), which rose 8.2%; and the iShares US Oil Equipment & Services ETF (IEZ US), which climbed 8.1%.

OPEC production cuts

Following the conclusion of OPEC’s latest meeting on 5 December 2019, the organization and its allied producers led by Russia announced a reduction in oil production of 500,000 barrels per day for the first three months of 2020.

While this figure represents the group’s official policy, many analysts believe the cuts may be deeper as Saudi Arabia has historically reduced production by more than required in order to counter any non-compliance by other OPEC members.

The market appeared to be pricing in expected production cuts in the days leading up to the announcement as the price of Brent Crude rose 5.6% from $60.9/barrel on 2 December to $64.3/barrel on 10 December, while WTI climbed 5.9% from $56.0/barrel to $59.3/barrel over the same period.

With the latest US shale inventories coming in lower than expected, and OPEC raising its global oil demand outlook for 2020, analysts are expecting a firm floor price of $60 per barrel on Brent Crude until at least the next OPEC meeting in March 2020.

The major caveat, however, is the potential for souring US-China trade relations to negatively impact global growth and lead to a reduction in oil demand. The deadline for the latest negotiations is due to expire on 15 December.

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