With crude oil prices stabilizing, investors may start looking back into energy ETFs to capitalize on the steady global expansion.
“We see the recent strength in oil prices moderating over the near term. Within energy-related assets, we prefer to invest in selected equities versus oil directly and maintain our neutral stance on high yield energy debt,” BlackRock strategists said in a recent research note.
The global market has suffered through a supply glut, but the Organization of Petroleum Exporting Countries and its allies have taken steps to rein in the oversupply. Later this month, the cartel will meet and is widely expected to extend oil production cuts, potentially through the end of 2018. Oil prices have already strengthened in anticipation of the extended cuts.
“We could see limited upward price movement if OPEC proceeds as expected and downside risk to oil prices if no extension is announced,” according to BlackRock.
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Weighing on the future outlook, non-OPEC countries could raise production output next year. For instance, in the U.S., shale producers may signal an intent to ramp up production, and the clean up efforts in wake of the hurricane season could also boost U.S. oil exports and increase global supply.
Meanwhile, ongoing tensions and volatility in the Middle East between Saudi Arabia and Iran, along with higher-than-expected oil demand on a growing global economy, could support pricing over the short-term.
Consequently, given the uncertainties, it may be more prudent to stick with more stable integrated energy companies if an investor were interested in the oil segment.
“We like global integrated oil companies. Some are improving cash flows, and the group has lagged recent price gains in exploration and production companies,” according to BlackRock.
For example, the iShares Global Energy ETF (NYSEArca: IXC) offers exposure to some of the largest companies that produce and distribute oil and gas around the world, such as Exxon Mobil 14.1%, Chevron 9.0%, Royal Dutch Shell 5.7%, Total SA 5.6%, BP Plc 5.3%, Schlumberger 3.6% and Conocophillips 2.5%, among others. Top country weights include 53.5% U.S., 16.1% U.K., 11.1% Canada, France 5.6% and Italy 2.6%.
For more information on the energy sector, visit our energy category.