Oil And Gas ETFs Are Headed Higher

When the Coivd-19 Pandemic began, the oil and gas industry went into the tank as demand for oil came to an abrupt halt. Around the world, air travel and domestic passenger vehicle travel were essentially non-existent when governments around the world implemented travel restrictions and lock-downs to slow the spread of the virus. Once stay-at-home orders were lifted, demand began to creep higher for oil, but since the airline industries consume a large percentage of global oil demand, for the bulk of 2020, oil prices and demand were still well off their normal levels.

As we moved further into the pandemic and passenger vehicle travel began to increase, airline and even the cruise line industry came back online, demand for gasoline quickly rose. At the start of 2022, demand was once again strong, and as the Omicron variant peeked in January, oil began flirting with $100 a barrel oil prices in the US, a level not seen since 2014.

Just a month or so later, the oil industry seems to be going through another significant change due to the Russian-Ukraine situation. Due to Russia being one of the largest oil and gas producers globally and countries around the world implementing sanctions against Russia, supply for the commodity appears to be a significant issue moving forward.

Most of Europe relies on imported Russian oil and gas. However, the longer the war in Ukraine continues, there is ever-increasing likelihood that Russian oil and gas may not make it to their end markets around Europe. Already we have seen Germany take steps to stop a pipeline project, and with reports that other natural gas pipelines may be stopped, the prices of natural gas and oil continue to creep higher. With that said, most EU nations and others outside of Europe have thus far stayed away from sanctioning the Russian oil and gas industry due to the very well-known fact that doing so would hurt Russia and citizens in Europe as prices would almost immediately sky-rocket. (But that's not to say these sanctions can't happen.)

Furthermore, with moves from British Petroleum and Shell to cut ties with Russian assets, it's clear Western companies no longer want to be associated with Russia's oil and gas industry, which may not have a direct effect on the price of the commodities today. Still, it could hamper development and capital spending in the coming years. These moves by global producers could be just as damaging to the Russian economy as some of the sanctions leveled on Russia by other world governments. This is due to the problem of funding and having available capital within Russia to develop and grow their oil and gas industry to increase production when commodity prices are elevated.

The industry worldwide dealt with a demand problem in 2020; in 2022 and beyond, the industry may be dealing with a supply problem, which the latter is a better problem to have for companies operating in the industry. So let's take a look at a few options investors have if they think prices will continue to rise.

The first two Exchange Traded Funds I would look at are the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Energy Select Sector SPDR Fund (XLE). These two ETFs track an equal-weighted index of US oil and gas and or energy companies. They would both offer exposure to and allow investors to benefit from higher oil and gas prices worldwide. XLE has an expense ratio of 0.12%, while XOP charges 0.35%, while both offer decent dividends to investors. The world's largest oil and gas stocks make up the top ten holdings of both funds, but XOP is a little more diversified, with 59 holdings compared to 21 holdings for XLE. But, both are good options for a vanilla oil and gas play ETF.

Or you could look at things like the United States Oil Fund LP (USO) or the ProShares Ultra Bloomberg Crude Oil ETF (UCO), which will be more geared towards crude oil futures prices.

Both funds will do very well if the situation in Europe deteriorates and prices around the globe rise due to either increased demand or reduced supply. Both funds have higher expense ratios at 0.79% and 0.95% than the other vanilla options mentioned above. However, these funds will likely increase investors' profits if prices climb. Year-to-date USO is up 16% while UCO is up 36%, largely due to UCO being a 2X leveraged product. Compared to XLE being up 23% and XOP increasing 14% during the same timeframe.

Investors need to consider what is occurring globally and how higher oil and gas prices could affect them directly. For example, suppose you see higher prices at the pump domestically. In that case, owning one of the ETFs mentioned above could help reduce some of the pain you feel at the pump, knowing your portfolio benefits from higher gasoline prices.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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