Oil and gas assets of all stripes, including the Alerian Energy Infrastructure ETF (ENFR), took plenty of bumps earlier in 2020, but look now because oil prices are closing in on pre-pandemic levels. Price increases present opportunity with exchange traded funds such as ENFR.
The ALPS ETF tracks the Alerian Midstream Energy Select Index (CME: AMEI). ENFR acts as a type of hybrid energy infrastructure ETF, which could help investors capture some of the high yields from MLPs while limiting the tax hit from solely owning MLPs.
Oil’s recent resurgence could serve to convert some market observers that were previously bearish on the energy patch. More importantly, higher prices can bolster the financial quality of oil and gas producers.
“The difference between $37 per barrel, where we were briefly again a few weeks ago, and $45 per barrel is absolutely enormous, particularly given these companies now have better strategies run by better managements in a more consolidated better sector,” wrote analyst Paul Sankey of Sankey Research. “The difference is approximately -3/bbl of free cash flow with deteriorating balance sheet, and +5/bbl of free cash flow. The move of the past month in oil has therefore been enormous.”
Examining ENFR Now, in 2021
It’s certainly been a roller coaster ride of volatility for oil this year, but bullish signals could be feeding into trader activity for the new year. Traders are also optimistic for the future, betting on more gains for oil come 2021.
“Oil prices have risen above $40 per barrel before, but analysts have mostly been cautious during those periods, fearing that the pandemic could cause longer-lasting damage,” reports Avi Salzman for Barron’s. “The rhetoric from Wall Street this time is different. The emergence of multiple promising vaccines has changed the calculus for energy.”
ENFR is getting a lift as positive updates on a coronavirus vaccine helped fuel bets that the economy will make a speedy recovery with the previously downtrodden, economically-sensitive segments gaining momentum.
Further supporting energy markets, the Organization of the Petroleum Exporting Countries, along with Russia and other producers, a group known as OPEC+, could extend a deal to curb output, Reuters reports. OPEC+, which meets on Nov. 30 and Dec. 1., will consider options to extend a deal on output cuts by at least three months from January.
ENFR has one last catalyst: a weak dollar, a condition many market observers expect will persist in 2021, and one that can provide a tailwind for crude prices.
Other MLP funds include the Global X MLP ETF (NYSEArca: MLPA) and the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.