Oil & Gas Industry Oulook
ISHARS-US O&G (IEO): ETF Research Reports
PWRSH-DYN ENRG (PXE): ETF Research Reports
SPDR-SP O&G EXP (XOP): ETF Research
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The Federal Reserve's decision to leave its monetary stimulus
program intact, together with positive momentum in the domestic
manufacturing sector and bullish data from the Chinese economy
have strengthened oil prices to 2-year highs of around $110 per
Partly offsetting this favorable view has been a spike in U.S.
production - now at its highest levels since 1989 - and easing
Syrian tensions. (Read:
Oil ETFs in Focus Ahead of Iran Talks
The immediate outlook for oil, however, remains positive given
the commodity's constrained supply picture. And, while the
Western economies exhibit sluggish growth prospects, global oil
consumption is expected to get a boost from sustained strength in
China, the Middle East, Central and South America that continue
to expand at a healthy rate.
EIA expects global oil demand growth by another 1.1 million
barrels per day in 2013 and by a further 1.2 million barrels per
day in 2014. Importantly, EIA's latest report assumes that world
supply is likely to go up by 0.8 million barrels per day this
year and by 1.2 million barrels per day in 2014. (Read:
Play Goldman's Views with These Commodity
In our view, crude prices in the final few months of 2013 are
likely to exhibit a sideways-to-bearish trend, trading in the
$100-$105 per barrel range.
Over the last few years, a quiet revolution has been reshaping
the energy business in the U.S. The success of 'shale gas' --
natural gas trapped within dense sedimentary rock formations or
shale formations -- has transformed domestic energy supply, with
a potentially inexpensive and abundant new source of fuel for the
world's largest energy consumer. (Read:
2 Ways to Short Natural Gas with ETFs
With the advent of hydraulic fracturing (or fracking) -- a method
used to extract natural gas by blasting underground rock
formations with a mixture of water, sand and chemicals -- shale
gas production is now booming in the U.S.
As a result, once faced with a looming deficit, natural gas is
now available in abundance. In fact, natural gas inventories in
underground storage hit an all-time high of 3.929 trillion cubic
feet (Tcf) in 2012. The oversupply of natural gas pushed down
prices to a 10-year low of $1.82 per million Btu (MMBtu) during
late April 2012 (referring to spot prices at the Henry Hub, the
benchmark supply point in Louisiana). (See All Energy ETFs
However, things started to look up in 2013. This year, cold
winter weather across most parts of the country boosted natural
gas demand for space heating by residential/commercial consumers.
This, coupled with flat production volumes, meant that the
inventory overhang was gone, thereby driving commodity prices to
around $4.40 per MMBtu in Apr -- the highest in 21 months.
During the last few weeks, though, natural gas demand has gone
through a relatively lean period, as mild weather prevailed over
the country, leading to tepid electricity draws to run air
conditioners. This led to a slide in the commodity's price. In
fact, healthy injections over last few weeks, plus strong
production, have meant that supplies have overturned the deficit
over the five-year average.
With more moderate weather expected during the next few weeks,
leading to reduced power demand, natural gas prices may
experience another downward curve. This, in turn, is expected to
pull down natural gas producers, particularly small ones.
PLAYING THE SECTOR THROUGH ETFs
Considering the turbulent market dynamics of the energy industry,
the safer way to play the volatile yet rewarding sector is
through ETFs. In particular, we would advocate tapping the energy
bull by targeting the exploration and production (E&P) group.
This sub-sector serves as a pretty good proxy for oil/gas price
fluctuations and can act as an excellent investment medium for
those who wish to take a long-term exposure within the energy
sector. While all oil/gas-related stocks stand to benefit from
rising commodity prices, companies in the E&P sector are the
best placed, as they will be able to extract more value for their
For those interested in taking a non-equity look at energy, we
have highlighted a few of the E&P ETFs tracking the industry
below, any of which could be interesting picks:
SPDR S&P Oil & Gas Exploration & Production
Launched in June 19, 2006, XOP is an ETF that seeks investment
results corresponding to the S&P Oil & Gas Exploration
& Production Select Industry Index. This is an equal-weighted
fund consisting of 72 stocks of companies that finds and produces
oil and gas, with the top holdings being
Forest Oil Corp.
Laredo Petroleum Holdings Inc.
Magnum Hunter Resources Corp.
(MHR). The fund's expense ratio is 0.35% and pays out a dividend
yield of 1.24%. XOP has about $910.9 million in assets under
management as of Sep 19, 2013.
iShares Dow Jones US Oil & Gas Exploration &
This fund began in May 1, 2006 and is based on a free-float
adjusted market capitalization-weighted index of 61 stocks
focused on exploration and production. The top three holdings are
Occidental Petroleum Corp.
Anadarko Petroleum Corp.
EOG Resources Inc.
(EOG). It charges 0.46% in expense ratio, while the yield is
0.84% as of now. IEO has managed to attract $448.0 million in
assets under management till Sep 19, 2013.
PowerShares Dynamic Energy Exploration and
PXE, launched in October 26, 2005, follows the Energy Exploration
& Production Intellidex Index. Comprising of stocks of energy
exploration and production companies, PXE is made up of 30
securities. Top holdings include
Noble Energy Inc.
(NBL), EOG Resources Inc. and
(COP). The fund's expense ratio is 0.65% and the dividend yield
is 2.26%, while it has got $85.4 million in assets under
management as of Sep 19, 2013.
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