Limited Oil Supply Is Driving ETF Prices Sky-High

As oil prices continue their upward climb, ETF investors can look to play the commodity’s strength with a pair of funds in the VanEck Vectors Oil Service ETF (OIH) and the VanEck Vectors Unconventional Oil & Gas ETF (FRAK).

OIH, which is up 40% YTD, seeks to replicate the price and yield performance of the MVIS® US Listed Oil Services 25 Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index.

The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the oil services segment. Such companies may include small- and medium-capitalization companies and foreign companies that are listed on a U.S. exchange.

FRAK, which is up almost 50% YTD, seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Unconventional Oil and Gas Index, which is intended to track the overall performance of companies involved in the exploration, development, extraction, and/or production of unconventional oil and natural gas.

FRAK Chart

The Oil Market Shortage

Like all commodities, oil adheres to the basic economic tenets of supply and demand. Irina Slav of recently penned a piece detailing the energy transition to renewable sources, and its subsequent effect on oil prices.

“Speaking of depressed exploration and underinvestment, the oil market is also facing a shortage despite the commodity’s fall from grace into deep disgrace as the ultimate reason for the sorry state in which the Earth’s atmosphere appears to be,” Slav wrote. “Two price crashes in the past ten years caused shrinking exploration, with the second crisis also accompanied by a pandemic that led to a historic demand collapse, further reducing the industry’s appetite for new exploration. The result: in just five years, the world will need 10 million bpd more oil than it has, according to French Total.”

“Total is not the only one warning of a shortage,” Slav added. “The American Petroleum Institute recently said that the combination of underinvestment and natural depletion will result in a shortage as soon as next year. Of course, the API is an industry organization, so one would expect such a warning from it, but the makings of a shortage are easy to see from a distance, too. Everyone in oil cut their investments in new exploration during the 2014 and the 2020 crisis. Last year many even had to reduce existing production because of the collapse in demand.”

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