8th Oct '22 by Edmund Shing

4 comments 2416 reads

Market Musings 081022:
Energy remains a strong point in a weak market tape

OPEC+ put a floor under global crude oil prices.

This week’s podcast:

Is the incredible growth in ETF popularity justified?

What is an ETF and why is it so attractive?
What are passive and active funds?
With so many ETFs on the market, how can investors know which ones to choose?
How do ETFs ensure that temporary cash is put to good use?
Are there any downsides to ETFs?

Summary:

Crude oil prices rebound higher…
As the OPEC+ oil-producing nations announce a 2 million barrel/day production cut
The US will also have to stop releasing their Strategic Petroleum Reserve soon
Chinese oil demand could rebound upon progressive economic reopening
These supply and demand factors suggest higher oil prices
A lot more investment will be needed for the energy transition

The path of least resistance for oil prices is... Higher

Crude oil prices have been drifting lower since peaking in early June at over USD120/barrel. They recently even fell to below where oil prices were prior to the Russian invasion of Ukraine in late February. Financial markets have been concerned about global recession risks and the consequent pressure on oil demand.

Crude oil prices rally on news of OPEC+ production cut

Source:Bloomberg

However, the OPEC+ oil cartel has changed this dynamic with their announcement this past Thursday at their Vienna meeting of a 2 million barrel/day oil production cut. This reduction in oil production is to take place gradually between November this year and the end of 2023. In the table shown here, note that the key oil-producing countries to cut production will be principally Saudi Arabia, Russia, the UAE and Iraq.

OPEC+ oil cartel announced a deep 2 million barrels/day production cut

Source: OPEC

Even though this announcement is somewhat of an exaggeration given that many OPEC+ members are already today NOT producing to their current oil quotas, the reduction in real oil production is still likely to be around 0.8m-1.0m barrels/day, still nearly 1% of global daily oil demand.

The US will stop their crude oil release of stocks from the SPR soon

Following the OPEC+ production cut announcement, President Biden on Wednesday said he would release 10 million more barrels of oil from the U.S. Strategic Petroleum Reserve (SPR) in November in a move to counter raising…

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KevinS1

9th Oct '22

Anyone holding or buying into £SPOG at the height of the Covid sell-off (or even in Oct) will have made a fantastic return - up to a 5-bagger.

I can see the attraction of £SPOG and others, but I'd be concerned with them at this price, that the slightest bit of bad news would lead to a significant price shock. For example, a definitive move towards a recession could create a major demand decline, or a signal of an end to the Ukraine war.

For me this is too much of a risk - I've been caught out too many times in the past by the "greed gene" and found that joining the party late often results in someone calling time just after arriving and being booted out into the cold, wet and dreary dark, with a long-walk home with tail tucked between legs.

I do hold plenty of exposure to O&G, but I've held these for a while and with most of them I hold them as much for the potential of major news around new resources as much for their short-term profits which at some time will normalise. I have also sold some off, protecting some of my gains.

If I was looking at this now, without any holdings, I'd be a little bit fearful of buying at the peak.

Howard Adams

Nice write up, many thanks.

I would add £IESU to your options as this ETF focuses specifically on the US energy sector with the Oil & gas suppliers featuring prominently.

EDIT: the £ thing not worked ... ISHARES V PLC S&P 500 ENERGY SECTOR UCITS GBP ACC (IESU)

I bought a small entry position recently.

Regards

Howard

sevenccc

If you believe prices are going up why not play it more directly via something like Wisdom Tree ETF £LOIL ? Leveraged play on oil price. Higher risk, highly correlated to price though with trader sentiment risk on top perhaps?

And if you think prices are too high you can play it the other way with the appropriately titled £SOIL !

Alphaflight

There is deep value to be found in the unloved oil and gas equipment and services sector. The ETF XES covers this well and pays a small dividend. Tubular steel required for the petrochemicals industry is another unloved area, see French company Vallourec, massive upside potential and only a few companies in the entire sector. Same argument for the geological geophysical businesses.

Market Musings 081022: Energy is a strong point in a weak market tape

Market Musings 081022:
Energy remains a strong point in a weak market tape

This week’s podcast:

Is the incredible growth in ETF popularity justified?

Summary:

The path of least resistance for oil prices is... Higher

The US will stop their crude oil release of stocks from the SPR soon

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

4 comments

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Unlock the metrics for all these stocks and more...

Market Musings 081022: Energy is a strong point in a weak market tape

Market Musings 081022:Energy remains a strong point in a weak market tape

This week’s podcast:

Is the incredible growth in ETF popularity justified?

Summary:

The path of least resistance for oil prices is... Higher

The US will stop their crude oil release of stocks from the SPR soon

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

4 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 081022:
Energy remains a strong point in a weak market tape