Sweta Killa: Crude oil prices have been rising over the past few months and are now hovering above the triple-digit mark thanks to geopolitical tensions in the Middle East. A strained relation between the West and Russia for invading Ukraine as well as uncontrollable violence in Iraq have threatened global oil supply disruption.
This is because both the countries are rich in oil and gas resources and are the major suppliers of the commodity. Russia is the world’s largest producer of crude oil while Iraq is the seventh largest producer. The supply crunch in other oil producing countries added to further woes. Fights in Libya, robbery in Nigeria oil fields and international sanctions against Iran over its nuclear program for exporting oil have taken a toll on oil supplies.
Though oil production in the U.S. is booming and has reached its highest level in 28 years on shale formations as well as newly tapped oil and gas fields in North Dakota and Texas, it is unlikely to recoup lost supplies from across the globe. On the other hand, global oil demand is rising on improving economic conditions, resulting in higher oil prices.
While the strength is beneficial for a number of oil producers and key oil producing countries, it is a major threat to oil consuming nations. After all, higher oil prices would restrict tax revenues or GDP growth opportunities in big oil importing countries. This is especially true as imports become more expensive and exports less valuable. It will lead to deterioration in balance of payments, lower output and increase inflation and unemployment rate in these countries, thereby leading to a drop in overall economic growth.
We have seen this phenomenon take place in a number of countries over the past few years, and with the advent of ETFs, these nations are easier to avoid. In light of this, we have highlighted three country ETFs that could see terrible trading in the months ahead should oil price rises or remain above $100 per barrel.
iShares India 50 ETF (NASDAQ:INDY)
India has become the world’s third largest importer, overtaking Japan early this year, and accounts for two-thirds of the crude oil requirements through imports. The Indian economy has shown some signs of strength on Narendra Modi led Bharatiya Janata Party’s win in the general election held in mid May, but has started losing steam lately with the rising oil prices.
This is because an increase in oil prices would flare up the already high inflation in the country putting pressure on the individual pockets or government’s finances in the form of increased subsidies. This suggests tough times ahead for the country and Indian ETFs in the coming months (read: Bear Market for India ETFs Following Modi’s Election?).
INDY is a large cap centric fund that follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. The fund is highly concentrated on its top 10 holdings as it accounts for about 54.7% of total assets. With respect to sector holdings, banks and software take the top two spots at 21.24% and 14.03%, respectively, while others make up for single-digit allocations.
The ETF has amassed $572.9 million and trades in volume of nearly 205,000 million shares a day. Expense ratio came in at 0.93%. INDY is up nearly 6% over the past month and has a Zacks ETF Rank of 3 or ‘Hold’ rating with Medium risk outlook.