Exchange traded funds that track the U.S. shale-oil industry could continue to come under pressure from the depressed crude prices due to the ongoing coronavirus pandemic.
According to the Institute for Economics and Peace, the COVID-19 pandemic has dragged down the price of oil, which will affect political regimes in the Middle East, especially in Saudi Arabia, Iraq and Iran, and it may “result in the collapse of the shale-oil industry in the U.S. unless oil prices return to their prior levels,” MarketWatch reports.
While oil prices have quickly recovered after recently trading in the negative territory for the first time ever, Goldman Sachs warned that the rise in the oil price has been overdone and projects declines in Brent crude prices to $35 a barrel, from around $43 a barrel, in the weeks ahead.
Meanwhile, shale oil, which is produced through fracking or the controversial process of pumping high-pressure water and sand underground to fracture rock and release valuable new energy reserves known as shale, may be particularly affected due to the high cost of extracting oil through this method.
The IEP pointed out that warned that the combined weakness in commercial, travel and industrial activity contributed to the rapid price decline in global oil markets. “These markets were already affected by an oversupply, emanating from Russia and Saudi Arabia who could not agree on production curbs,” it added.
Consequently, energy-related ETFs with exposure to this segment of the economy may be especially at risk, like the VanEck Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK), which includes a focus on hydraulic fracturing. Other areas that are also exposed to the ongoing risks include exploration and production companies, along with related ETFs like iShares U.S. Oil & Gas Exploration & Production ETF (Cboe: IEO) and SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP). Additionally, the broader Energy Select Sector SPDR (NYSEArca: XLE) also includes large tilts toward heavyweights like Exxon Mobil and Chevron that are among the biggest producers of shale oil.