Energy ETFs Could Gain Momentum as Oil Market Fundamentals Shift | ETF Trends

Energy sector-related exchange traded funds could maintain their forward momentum to next year as global demand for crude oil surpasses pre-pandemic levels and supply remains constrained.

According to the International Energy Agency, global oil demand will rise above pre-pandemic levels next year, with much of the growth in demand driven by China as the developing economy emerges from its COVID-19 lockdowns, the Wall Street Journal reported.

On the other hand, IEA warned that supply growth could lag behind demand, which would further exacerbate the already tight market that has experienced soaring prices with a 500,000 barrel per day deficit.

Meanwhile, U.S. oil producers are projected to support the supply increases next year, but the Organization of the Petroleum Exporting Countries members could continue to struggle to meet output targets.

The IEA estimated that crude oil demand could rise by 2.2 million barrels per day to 101.6 million barrels per day in 2023, or above its 2019 levels for the first time since the pandemic began.

Developed countries in Europe and North America have made up most of the rebounding demand in 2022, while less developed economies that aren’t members of the Organization for Economic Cooperation and Development accounted for 80% of oil demand growth in 2022, according to the IEA.

China, which saw economic growth slow this year as a result of a spike in COVID-19 cases and lockdowns, is projected to see oil demand expand by 930,000 barrels per day in 2023, re-establishing its “position as the primary engine of global oil demand growth,” the IEA said.

The recovery in international travel could increase jet fuel demand by 990,000 barrels per day in 2023 as well.

While demand rebounds, supply won’t be able to keep up the pace. The IEA expects global oil supplies to increase by 1.3 million barrels per day to 101.1 million barrels per day in 2023 or a 500,000 barrel per day deficit.

Investors can utilize ETFs to capture these shifting dynamics. For example, the Energy Select Sector SPDR (XLE), the Vanguard Energy ETF (VDE), the iShares U.S. Energy ETF (IYE), and the Fidelity MSCI Energy Index ETF (FENY) offer broad exposure to the energy sector.

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