Oil is coming off its worst quarterly performance in decades and the commodity resides at multi-year lows. That and the energy sector is struggling mightily, a confluence of factors that would appear to bode ill for ETFs, such as the VanEck Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK).
FRAK, which debuted just over eight years ago, follows the MVIS Global Unconventional Oil & Gas Index. That gauge “is intended to track the overall performance of companies involved in the exploration, development, extraction, and/or production of unconventional oil and natural gas. Unconventional oil and gas include coal bed methane, coal seam gas, shale oil, shale gas, tight natural gas, tight oil, tight sands, in situ oil sands, and enhanced oil recovery,” according to VanEck.
Domestic shale producers are being pinched by Saudi Arabia and Russia flooding the market with crude at a time of slack demand, but Goldman Sachs believes U.S. shale firms could eventually benefit from what now appears to be an ominous scenario.
“Shale’s high-pressured wells and short drilling time mean the industry is well-positioned to benefit if the current plunge in oil causes long-term damage to production capacity, resulting in a price jump when demand returns, Goldman analyst Damien Courvalin said in a note,” reports Bloomberg.
Other Considerations
Stabilizing crude oil prices and potential production increases from U.S. shale producers could also bolster the case for North American refiners. The U.S. refining sub-sector has been one of the most profitable sectors in the U.S. economy over the past five years. That could boost the case for FRAK’s stablemate, the VanEck Vectors Oil Refiners ETF (NYSEArca: CRAK).
The U.S. has become more self-sufficient with oil needs. With that in mind, investors looking to diversify in areas that have previously underperformed are coming up with strategies.
“Shale’s flexibility is similar to the spare capacity that OPEC stalwarts such as Saudi Arabia and the U.A.E. keep on hand to be able to boost production on short notice, Courvalin said,” according to Bloomberg.
From a fundamental standpoint, the price is right, and the increase in concentration in the U.S. will help. Additionally, being more energy independent means being less concerned with production outside the U.S.
“Shale wells’ high initial pressure means that there is a strong likelihood that companies can shut them in and later resume production with limited lost capacity, Courvalin said,” reports Bloomberg.
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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.
