Positive economic data and geopolitical fears have helped
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
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
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
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.
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
As such, natural gas' near-term fundamentals remain sketchy, to say
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
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 82 stocks of companies that finds and produces
oil and gas, with the top holdings being
Goodrich Petroleum Corp.
Halcon Resources Corp.
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 &
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
EOG Resources Inc.
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
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.
Marathon Petroleum Corp.
(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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