After a smooth ride in the early phase of the year, oil prices have persistently declined over the past one month. The slide has been so acute that oil prices touched the lowest level in 27 months on October 7. Global slowdown mainly in Europe and China that crippled manufacturing activities, a surge in oil output and a spike in the greenback thanks to the wrap-up of QE policy in the U.S. punished oil prices.
The value of the U.S. dollar peaked to the four-year high with respect to a basket of currencies as investors wagered on the speeding domestic growth. As we know oil price shares an inverse relationship with the greenback, the recent slide is self explanatory. Also, easing geopolitical tensions in oil rich nations like Russia repressed oil supply worries, reinforcing the plunge.
Oil inventory remains in a good shape in the U.S. Per Bank of America, the U.S. will likely be the world’s prime oil extractor in 2014 leaving Saudi Arabia and Russia behind courtesy of its shale-oil boom. In fact, the U.S. has produced the most oil in 28 years this year whereas the Organization of the Petroleum Exporting Countries (OPEC ) delivered the highest yearly production growth. Per the Energy Information Administration (EIA), oil production in the U.S. will peak to the highest point in 45 years next year.
Per Bloomberg, the International Energy Agency (IEA) trimmed its forecast for oil demand this year and the next, following lackluster global growth. Not only that, the Energy Information Administration (EIA) and OPEC also shared similar views. Saudi Arabia – a leading oil exporter – has already curtailed its prices by $1 per barrel for Asia and reduced its production steeply, as noted by Bloomberg.
Natural gas also suffered the same fate. In August, EIA noted that natural gas inventories – which plunged to 11-year lows in March – sprung back at the best clip since 2001. Though present stockpiles were lower than the year-ago level and the 5-year average, the reserves are being fast filled up and have in turn put a cap on prices.
Quite expectedly, poor end-market demand posed a pricing pressure on the energy exploration and production companies. Over the past one month, these energy ETFs have bled badly, losing in the range of 8–23%. The space is in the red from the weekly and monthly point of view. Below, we highlight three ETFs that were crushed by the recent sell-off and should be monitored closely in the coming days as well:
ISE-Revere Natural Gas Index Fund (NYSEARCA:FCG)
This product offers exposure to the U.S. stocks that derive a substantial portion of their revenues from exploration and production of natural gas. It follows ISE-REVERE Natural Gas Index and holds 31 stocks in its basket that are well spread out, with each component holding less than 3.96% of assets (read: Can a Heat Wave Turn Around the Natural Gas ETF?).
Though FCG is not much popular in the energy space having AUM of $381 million, it sees solid trading in volumes of about 450,000 shares per day on average. The ETF charges 60 bps in annual fees and expenses, and lost nearly 23% in the last one month (as of October 10). FCG was down about 11.5% last week.