A Comprehensive Guide to Oil & Gas ETFs - ETF News And Commentary

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Positive economic data and geopolitical fears have helped oil prices stay above the major psychological threshold of $100 per barrel.

Crude's recent run has been spurred by a spate of upbeat reports, providing further evidence that the U.S. economy is coming out of its winter freeze. This has prompted hopes for robust fuel and energy demand in the world's biggest oil consumer. The bullish momentum has been further propelled by continued confrontation between Moscow and the West, threatening to derail hydrocarbon supplies from Russia.

Sentiments were also helped by the Federal Reserve's measured Taper announcement. The central bank -- asserting that the U.S. economy was strong enough -- reduced bond repurchases to $45 billion a month from May. (Read: Top Ranked Energy ETFs and Stocks Set to Roar Higher )

Partly offsetting this favorable view has been a spike in domestic production - now at their highest levels since 1988 - that has ballooned crude inventories to 399.4 million barrels, the most on record.  The imminent resumption of oil exports from the Libyan coast has also been a drag on prices. 

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, which continue to expand at a healthy rate despite some moderation.

According to the Energy Information Administration (EIA), which provides official energy statistics from the U.S. Government, world crude consumption grew by an estimated 1.2 million barrels per day in 2013 to a record-high level of 90.4 million barrels per day.

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, the EIA's latest report assumes that world supply is likely to go up by 1.4 million barrels per day in 2014. (Read: Leveraged ETFs Round-up: Nat Gas, Gold Miners, India in Focus )

In our view, crude prices in the next few months 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.

Natural Gas

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.

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).

However, things have started to look up somewhat following a frigid winter that saw the heating fuels' demand take off. This pushed commodity prices to its highest level in 5 years earlier this year. In fact, natural gas supplies are coming off their 11-year-lows, prompting fears about the timely replenishment of the inventories ahead of the next heating season, starting from November.( Read: Strong Earnings Put Unconventional Oil ETF in Focus )

As such, natural gas' near-term fundamentals remain sketchy, to say the least.

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 here )

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 ETF (XOP):

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 82 stocks of companies that finds and produces oil and gas, with the top holdings being Goodrich Petroleum Corp. (GDP), Halcon Resources Corp. (HK) and Comstock Resources Inc. (CRK). The fund's expense ratio is 0.35% and pays out a dividend yield of 0.70%. XOP has about $1,087.0 million in assets under management as of May 7, 2014.

iShares Dow Jones US Oil & Gas Exploration & Production ETF (IEO):

This fund began in May 1, 2006 and is based on a free-float adjusted market capitalization-weighted index of 77 stocks focused on exploration and production. The top three holdings are ConocoPhillips (COP), EOG Resources Inc. (EOG) and Anadarko Petroleum Corp. (APC). It charges 0.45% in expense ratio, while the yield is 0.85% as of now. IEO has managed to attract $487.2 million in assets under management till May 7, 2014.

PowerShares Dynamic Energy Exploration and Production (PXE):

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 Valero Energy Corp. (VLO), Marathon Petroleum Corp. (MPC) and Phillips 66 (PSX) The fund's expense ratio is 0.65% and the dividend yield is 1.43%, while it has got $134.4 million in assets under management as of May 7, 2014.

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SPDR-SP O&G EXP (XOP): ETF Research Reports

ISHARS-US O&G (IEO): ETF Research Reports

PWRSH-DYN ENRG (PXE): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: EIA , XOP , GDP , HK , CRK

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