Oil & Gas Industry Outlook
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MKT VEC-RETAIL (RTH): ETF Research Reports
US-OIL FUND LP (USO): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
SPDR-SP O&G EXP (XOP): ETF Research
SPDR-SP RET ETF (XRT): ETF Research Reports
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Expectations of an improving economy and bullish supply data have
strengthened oil prices to around $95 per barrel. Crude's recent
run has been spurred by the Federal Reserve's measured Taper
announcement, based on assertion that the U.S. economy was strong
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This has fueled hopes for robust fuel and energy demand in the
world's biggest oil consumer. The bullish momentum was further
propelled by positive revision to third quarter GDP numbers and
continued decline in U.S. supplies.
Partly offsetting this favorable view has been a spike in
domestic production -- now at their highest levels since 1988 -
and suggestions of increase in Libyan oil exports following
months of political turmoil.
The immediate outlook for oil, however, remains positive given
the commodity's constrained supply picture. In particular, 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. (Read:
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According to the Energy Information Administration (EIA), which
provides official energy statistics from the U.S. Government,
world crude consumption grew by an estimated 1.1 million barrels
per day in 2013 to a record-high level of 90.3 million barrels
The agency, in its most recent Short-Term Energy Outlook, said
that it expects global oil demand growth by another 1.2 million
barrels per day in 2014. Importantly, EIA's latest report assumes
that world supply is also likely to go up by 1.2 million barrels
per day in 2014.
In our view, crude prices in the first half of 2014 are likely to
exhibit a sideways-to-bearish trend, trading in the $90-$100 per
barrel range. As North American supply remains strong and the
groundbreaking agreement with Iran makes it easier for the
country to sell the commodity, we are likely to experience a
pressure in the price of a barrel of oil. (Read:
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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.
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. Coupled with
sophisticated horizontal drilling equipment that can drill and
extract gas from shale formations, the new technology is being
hailed as a breakthrough in U.S. energy supplies, playing a key
role in boosting domestic natural gas reserves. (Read:
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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).
Investors continue to focus on temperature patterns to understand
the fuel's economic dynamics. As it is, natural gas fundamentals
look uninspiring with supplies remaining ample in the face of
underwhelming demand. In fact, it is expected to take many years
for the commodity's demand to match supply in the face of newer
Despite these issues, natural gas rallied to a two-year high
recently on the back of persistent decreases in supplies and
freezing cold weather conditions, which boost natural gas demand
for space heating by residential/commercial consumers.
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
products. (See all energy ETFs
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 79 stocks of companies that finds and produces
oil and gas, with the top holdings being
Magnum Hunter Resources Corp.
Green Plains Renewable Energy Inc.
Valero Energy Corp.
(VLO). The fund's expense ratio is 0.35% and pays out a dividend
yield of 0.86%. XOP has about $617.7 million in assets under
management as of Jan 14, 2014.
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 75 stocks
focused on exploration and production. The top three holdings are
EOG Resources Inc.
(EOG). It charges 0.45% in expense ratio, while the yield is
0.90% as of now. IEO has managed to attract $421.5 million in
assets under management till Jan 14, 2014.
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
Top holdings include Valero Energy Corp,
Marathon Petroleum Corp.
(MPC) and EOG Resources Inc. The fund's expense ratio is 0.65%
and the dividend yield is 1.75%, while it has got $109.7 million
in assets under management as of Jan 14, 2014.
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