As has been widely documented, the energy sector is rebounding in dramatic fashion. However, some exchange traded funds are more levered to that theme than others. Risk-tolerant investors may want to consider exploration and production ETFs as a way of gaining exposure to more upside in oil prices.
That includes the iShares U.S. Oil & Gas Exploration & Production ETF (Cboe: IEO). IEO follows a traditional market capitalization-weighted indexing methodology, which exposes investors to larger companies like ConcoPhillips, EOG Resources and Phillips.
The $432.31 IEO holds 63 stocks and tracks the Dow Jones U.S. Select Oil Exploration & Production Index.
Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. The challenge for energy equities is that some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices.
The Case For Energy Equities
There are geopolitical catalysts looming that spark higher oil prices, which have the potential to beneift ETFs such as IEO.
“We see today’s backdrop of heightened Gulf tensions, supply constraints and steady global economic growth persisting,” said BlackRock in a recent note. “Geopolitical tensions in the Middle East could flare further in the near term, particularly between the U.S. and Iran. Oil supply could also tighten if OPEC extends production cuts in June, or Venezuelan production falls further. Yet the rise in oil prices we have seen so far is unlikely to pose a significant drag on the global economy and its impact on core inflation should be minimal, we believe.”
Related: 3 Energy ETFs Climb as Oil Hits Highest Since 2014
A combination of diminished global output and rising global demand have helped reduce the global supply glut that dragged on oil prices for years. Production cuts from the Organization of Petroleum Exporting Countries and their allies have largely contributed to the cut in supply. Meanwhile, expanding economies around the world has bolstered demand for raw materials such as crude oil.
“For investors seeking exposure to oil today, we see a stronger case for investing in energy equities over crude itself or energy-related debt. Oil prices have run well ahead of energy stocks this year but this trend has started to turn. One factor supporting energy firms: their focus on capital discipline, evident in first-quarter earnings results,” according to BlackRock.
For more information on the oil market, visit our oil category.