Notably, crude slipped below $60 a barrel for the first time since February and Brent under $70 a barrel on renewed concerns over supply and waning demand.
Inside the Pain
Bearish indicators have taken the front seat due to the barrage of negative news that point toward a period of prolonged low oil prices. First, oil peaked in October on concerns that U.S. sanctions on Iran would crimp supply but this trend reversed due to softer-than-expected Trump’s approach to Iran sanctions. This is because the United States granted temporary waivers to eight key buyers — China, India, Greece, Italy, Taiwan, Japan, Turkey and South Korea — allowing them to continue importing oil from Iran.
Secondly, Trump negated the optimism over Saudi Arabia’s plans to combat oversupply fears by cutting OPEC production by around 1 million barrels per day from October levels. Additionally, U.S. shale production has been increasing rapidly. Per the latest EIA report, U.S. production astonishingly increased 400,000 barrels per day in the first week of November, pushing the output up to 11.6 million barrels per day.
The ongoing trade tariff dispute between Washington and Beijing, weakening eurozone economic growth and troubles in emerging market due to rising interest rates in the United States have sparked concerns over global economic growth. This is likely to weigh on the oil demand. Last month, the International Monetary Fund cut its global economic growth forecasts by 0.2% each for 2018 and 2019 to 3.7% (read: IMF Cuts Global Growth Forecast: ETFs in Focus).
Further, the OPEC has reduced its 2019 demand outlook for the fourth consecutive month, citing that growth in supplies from non-OPEC countries would outpace growth in demand, leading to widening excess supply in the market. The agency now forecasts the world’s appetite for crude will grow by 1.29 million barrels per day (bpd) in 2019, down 70,000 bpd from its projection last month. It expects output from non-member nations to increase 2.23 million bpd next year, up 120,000 bpd from its last forecast.
Who is Benefiting?
Given the deteriorating supply/demand trends, crude prices are expected to remain muted at least for the short term and could drop further if oversupply of oil persists. While slump in oil prices are hurting oil exporting and production companies, it has been a blessing for few zones, including airlines, retail, consumer discretionary, oil importers and refiners. As a result, we have highlighted ETFs from these five areas that are likely to benefit the most from lower oil prices.
U.S. Global Jets ETF JETS
Airlines are the biggest beneficiaries of lower oil price as fuel accounts for the major portion of their operating expenses. As such, lower oil price will likely boost their profitability, propelling JETS higher. This is the pure play ETF providing exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product holds 34 securities. The fund has gathered $91.2 million in its asset base while charging investors 60 basis points (bps) in annual fees. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook.
VanEck Vectors Oil Refiners ETF CRAK
Oil refiners are the only bright spot in the energy space amid declining oil price. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, lower oil prices could result in higher margins for refiners. With AUM of $58.7 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, holding 24 stocks. The product charges 59 bps in annual fees (read: 4 Sector ETFs That Beat the Market in Q3).
SPDR S&P Retail ETF XRT
Lower oil prices coupled with improving economy bodes well for the holiday season. XRT targets the retail sector and tracks the S&P Retail Select Industry Index. It is home to 95 stocks in its basket and charges 35 bps in annual fees. The fund has AUM of $597.6 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Retail ETFs in Focus Ahead of Q3 Brick-and-Mortar Earnings).
Consumer Discretionary Select Sector SPDR Fund XLY
Lower oil price leads to higher consumer spending, which accounts for more than two-thirds of the U.S. economic activity. The consumer discretionary sector will thus see a spike. XLY offers exposure to 65 consumer discretionary stocks by tracking the Consumer Discretionary Select Sector Index. It is the largest and the most popular product in this space with AUM of $13.3 billion and charges 0.13% in expense ratio. The product has a Zacks ETF Rank #2 with a Medium risk outlook.
iShares MSCI India ETF INDA
Lower oil prices are benefiting India the most as it is the world’s third largest importer of crude oil, accounting for two-thirds of crude oil requirements. It is tempering the country’s inflation, which tends to rise during a period of growth, and increasing consumer power for both spending and savings. This suggests good times ahead for the country as well as Indian ETFs. INDA, the ultra-popular ETF with AUM of $4.4 billion, offers exposure to large and mid-cap companies by tracking the MSCI India Index. It charges 68 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Are India ETFs No More a Hot Investing Spot?).
The Consumer Discretionary Select Sector SPDR ETF (XLY) was trading at $107.88 per share on Wednesday afternoon, up $0.12 (+0.11%). Year-to-date, XLY has gained 9.63%, versus a 1.97% rise in the benchmark S&P 500 index during the same period.
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