Just as crude got a fresh lease of life post-OPEC’s output boost deal, the investing world must have gotten busy in re-shuffling their portfolios. OPEC members met on Jun 22 to discuss the feasibility of an output boost proposal.
Though no concrete figures have been provided, OPEC will now return to 100% agreement to the previously agreed output cuts. Saudi Arabia said the renewed deal will result in a nominal output rise of around 1 million barrels per day (bpd) or 1% of global supply while as per Iraq, the real increase would be a little less at around 770,000 bpd as many countries will strive to attain full quotas.
“People probably feared 1.5 million barrels a day.” Now a real output boost of about 770,000 bpd came as a pleasant surprise for the space, sending oil higher. WTI crude ETF United States Oil (NYSE:USO) USO and Brent fund United States Brent Oil (AX:BNO) gained more than 5% and 3.7% on Jun 22, respectively.
What Prompted OPEC to Boost Output?
The OPEC and non-OPEC members have been currently following an output cut agreement of 1.8 million bpd. However, OPEC reduced more than what was required. OPEC pegged the agreement at 152% in May of this year, resulting in an additional output cut of about 624,000 barrels a day.
This shortage seems to have failed to meet market demand (in the wake of increasing global demand) and forced the cartel to pump out more oil. Also, to make up for the supply loss from Venezuela and Iran, OPEC finalized the latest output raise deal.
Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on rising crude prices as well as ones that are likely to underperform.
Gainers
Energy – SPDR S&P Oil & Gas Exploration & Production (MX:XOP) ETF ( (V:XOP) )
This is an obvious choice. If oil price remains stable on the smaller-than-expected output boost as well as a declining U.S. crude inventory, oil exploration and production stocks are sure to benefit as these companies will tend to pump more oil ahead. XOP added about 3.2% on Jun 22 (read: Oil Price Jumps on Syria Turmoil: ETFs & Stocks to Trade).
Losers
Retail - SPDR S&P Retail (MX:XRT) ETF (XRT)
Lower gasoline prices are good news for retailers as consumers can make energy savings and spend more money on discretionary items. So, rising energy prices are not likely to bode well for retailers. XRT lost about 0.3% on Jun 22
Airlines - U.S. Global Jets ETF ( (KL:JETS) )
The airline sector performs better in a falling crude scenario. This is especially true as energy costs form a major portion of overall costs of this sector. So, rising crude prices are likely to dent earnings of airline companies. The fund lost about 1.2% on Jun 22.
Before the OPEC meeting, IATA expected oil price to average $70 a barrel this year, up from $54.90 last year and its earlier guidance of $60. This along with a few other factors led IATA to cut the profit outlook of the industry (read: Will the Airline ETF Crash on Oil Price Jump?).
Transportation – iShares Transportation Average ETF (IYT)
The broader transportation sector is set to lose from rising crude. This is especially true as energy costs form a major portion of overall costs of this sector. The fund slipped about 0.5% on Jun 22.
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US-OIL FUND LP (USO): ETF Research Reports
ISHARS-TRAN AVG (IYT): ETF Research Reports
SPDR-SP RET ETF (XRT): ETF Research Reports
US BRENT OIL FD (BNO): ETF Research Reports
SPDR-SP O&G EXP (XOP): ETF Research Reports
GUGG-SHIPPING (SEA): ETF Research Reports
US GLOBAL JETS (JETS): ETF Research Reports
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