Energy ETFs for your portfolio | BetaShares Insights

Tight oil supplies could fuel interest in energy

BY David Bassanese | 29 August 2018
Tight oil supplies could fuel interest in energy stocks

With solid global demand and ongoing supply side disruptions, oil prices could well remain reasonably firm over the coming year. If so, there may be investment opportunities in energy related ETFs. In this post, I examine the dynamics of oil and investment opportunities further.

Oil Market Appears Tight

Since bottoming in early 2016, global oil prices have been trending higher thanks to continued solid demand and a tightening in global supplies due to both OPEC production cuts and emerging capacity constraints in the US shale oil sector.  Supply disruption in Venezuela and Angola together with looming new sanctions on Iranian oil exports have only added to the upside pressure of late.

In the 12-months to end-July alone, the West-Texas oil price lifted by 37%, from $US50.20 to $US 68.71 a barrel.

West-Texas Crude Oil Price $US/barrel

Source: Reuters. Past performance is not an indicator of future performance.

Responding to higher oil prices, OPEC recently agreed to lift production somewhat, even though Saudi Arabia appears to be the only member country with much spare capacity to offer a thirsty market. And – despite pressure from China and the US – the Saudi’s appear keen to keep prices at least around current levels, especially given the still planned float of its State oil company, Aramco.

Adding to the pressure in the oil market is America’s newfound desire to severely curtail Iranian oil exports through sanctions, which, if successful, could reduce global supply by a hefty 1 to 2 million barrels per day in coming months.  As evident in the chart below, these pressures are coming at a time when the US Energy Information Administration (EIA) is already projecting a reasonably tight market heading into 2019, with OPEC spare production capacity back to the lows of the mid-2000s when oil prices last started to spike higher.

Investment Opportunities in the Energy Sector

If oil prices stay high, and especially if they move a lot higher, further investment opportunities may well emerge in the energy sector. In this regard, BetaShares offers two types of exposure – one that aims to  track the return from investing in the West-Texas near-term oil futures contract (the OOO ETF) and one that aims to track an index of the world’s leading energy companies (the FUEL ETF).

The OOO ETF has tended to track oil prices reasonably well, but not exactly, as the ETF’s return also effectively depends on what is already priced into the market in terms of future expected price moves  (more detail on this is provided here). That said, in the 12-months to end-July, the OOO ETF returned 37.4%  – which was very close to the actual rise in the West-Texas oil price (which as per above was 37.1%).

Past performance is not an indicator of future performance. You cannot invest directly in an index. Excludes impact of ETF’s fees and costs.

Another way to gain exposure to the performance of oil is by investing in global oil companies, such as through the FUEL ETF.  As seen in the chart below, there has also been a broadly positive – albeit not perfect – correlation between oil prices and the relative performance of FUEL’s Index versus the world equity benchmark.  In the 12-months to end-July, the FUEL ETF returned 25.7%, handily outperforming the 12.3% return of the MSCI All-Country Index in local currency terms.

Past performance is not an indicator of future performance. You cannot invest directly in an index. Excludes impact of ETF’s fees and costs.

Indeed, based on broad relationships over time, the chart above suggests energy companies may not have performed as well over the past twelve months as much as might have been expected given the lift in oil prices.  All else constant, that suggests there could be scope for FUEL’s Index of energy companies to close this relative performance gap if oil prices hold around current levels, or rise further.

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