When the European Union voted to cut off Russian crude on May 31st, it was essentially a green light to buy oil stocks and, thus, a number of oil-focused ETFs. But before we dig into a few options that you should look at, let's talk about why this move is good for the oil industry and not necessarily your wallet.
The European Union voted to ban nearly all Russian oil from entering Europe. The details of the agreement essentially cut Russian oil imports into Europe by 90% over the next six months. The 27-country bloc relies on Russian oil for roughly 25% of what they consume. The ban directly applies to Russian oil that is delivered by sea, which means landlocked countries and Hungary, which receive the oil via pipelines, will still be permitted to access the commodity.
The goal of these sanctions is to cripple the Russian economy and force them to stop the war in Ukraine; however, Russia has already stated that they have other buyers of their oil in Asia, particularly China and India. Many believe Russia will be able to sell its oil to other countries but at a discount. Which will hurt Russia but may not have as much of an effect as the EU and other allied countries would like to see.
In turn, that will allow Russia to continue with the war in Ukraine and likely continue to keep oil prices high for Western countries, the United States included. This is where your wallet comes in since we are already seeing gas prices at record highs and now more sanctions occurring in Europe, which could push prices even higher here in the United States as the EU has to find a way to replace their supply.
While this is not good for the consumer, it does appear to be a pro for the oil companies that operate in the West, with ExxonMobil, BP, and Shell, just to name a few. It also could be a good sign for the smaller players here in the US that are targeting the oil and gas shale reserves found throughout the US. Furthermore, the equipment suppliers could also see an uptick in business as more wells are opened, and more supply is being pumped in an attempt to both capitalize on the higher prices and then offset the supply-demand imbalance.
One of the first places I would look if you are interested in investing with these changes is the Energy Select Sector SPDR Fund (XLE) and or the SPDR Oil & Gas Exploration & Production ETF (XOP). I recently mentioned both of these funds when the situation between Russia and Ukraine was still new, but my opinion that these are both good buys, has not changed, perhaps only grown stronger. I would though add the VanEck Oil Services ETF (OIH) to your research list. All three funds offer exposure to the largest oil companies in the world, all of whom will benefit from higher prices, but are diversified enough with 20 or more holdings so that you are going to be too exposed to an oil spill type of disaster.
If you want to be invested more directly in the price of oil and not the companies involved in pumping and producing it, you can buy something like the Invesco DB Oil Fund (DBO) or the United States Oil Fund (USO). Both of these funds hold futures contracts on crude oil. Thus, if the price of a barrel of crude continues to climb, these funds will increase in value alongside. However, if the price of oil falls, these funds will suffer or even stay stagnant; these may not perform well.
Another even aggressive play would be to buy the Direxion Daily Oil Services Bull 2X Shares ETF (ONG). This fund is leveraged 2 times the daily exposure to a market cap-weighted index of the 25 largest US-listed companies. This fund basically invests in the same companies that OIH owns. But ONG will produce double the daily move that OIH has, both to the upside and downside. It will also experience contango, meaning you should not hold it for long periods of time due to its 2X leveraged nature.
Based on the current situation in Europe with Russia and Ukraine and how world leaders are attempting to stop the fighting and increased travel both here in the US and around the world as we grow to live with the Covid pandemic, it is hard to see how gas prices don't remain elevated for an extended period of time. This means that even if you have not yet bought into the industry, you may not have missed the bus.
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.
