Last week the Organization of the Petroleum Exporting Countries or OPEC announced that the group had to come an "agreement" to reduce oil production. The new deal slated to cut production from an estimated 33.2 million barrels per day down to 32.5 million barrels per day.
While some Wall Street analysts don't believe the production reduction will actually happen, the fact remains that since OPEC made the announcement, the price of oil is up rather dramatically. Prior to the announcement oil was trading around the $44.50 range and has since jumped to the $50 range.
Many investors are looking at the price of oil and wondering how they can get a piece of this action. Let's take a look at three Exchange Traded Funds you can buy if you believe oil prices will continue to increase.
The first of the three is the most basic and you can use it to profit from both rising and falling oil prices. The United States Oil ETF (PACF:USO) is an ETF that tracks the futures prices of West Texas Intermediate or WTI sweet crude oil being delivered to Cushing, Oklahoma. This fund offers investors the opportunity to invest directly in the commodity through the form of futures contracts, not oil and gas companies. But, because USO invests through the use of futures, there is a certain amount of decay to the value of the fund over time. Due to this 'decay' investors should only use USO for short periods of time.
Furthermore, USO carriers a rather high expense ratio of 0.74%, but sometimes higher fees are worth it when you can make 8% in one month, which is by the way how much USO is up over the last 30 days. Investors have benefited from the OPEC 'agreement' as the price of oil has risen in the short term, but it can't be stressed enough that this is a short-term investment and only if you believe oil will continue to increase. Over the past three months, USO is down 5.21% while being off more than 24.5% over the last 12 months.
Your next option would be buying the Energy Select Sector SPDR ETF (PACF:XLE). The XLE tracks a market-cap-weighted index of US energy companies found within the S&P 500. Because XLE pulls its stocks only from the S&P 500, it has a smaller portfolio, but it also offers investors a little more stability since some of the mid and small cap oil and gas companies are excluded. It currently has 37 holdings with Exxon Mobil (XOM) being the largest at 18% of the fund, Chevron (CVX) being the second largest at 14.3% and Schlumberger (SLB) being the third at 8% of the fund.
XLE also offers a 2.61% dividend yield, has a low expense ratio of 0.14%, and is up 2.79% over the last 30 days while its year-to-date performance is a gain of 19.2%. Higher oil prices will be good for all the 37 stocks found in XLE, but because of its diversity, the gains will likely be smaller in the short term than USO's, if the price of oil continues to creep higher slowly.
Lastly, we have an even more focused oil and gas play than XLE with the SPDR S&P Oil & Gas Equipment & Services ETF (PACF:XES). This ETF focuses on the oil and gas equipment and service providers, meaning you will not find Exxon, Chevron, BP, Conoco Philips or any of the other big oil companies in this ETF. The reason this may interest some investors is that when oil and gas companies begin to ramp up production because the price of oil is increasing, these companies will dramatically benefit, pretty much regardless of the price. The only real-time the price of oil matters to these companies is when it's way low. Way low oil means companies stop drilling, pumping, shipping; they close down operations and thus don’t need equipment or services. The higher the price of oil goes and remains lofty, the better XES will perform.
XES has an expense ratio of 0.35%, holds 34 stocks with the top ten consuming 39% of the portfolio and offers a dividend yield of 1.11%. Baker Hughes, Schlumberger, and Haliburton all sit in its top five holdings.
Regardless of which option mentioned above is best for you, remember that the price of oil is rather volatile and could come crashing down anytime. It is best you only invest what you can afford to lose. Keep an eye open for a future post discussing three ETFs you can buy if you think the OPEC 'agreement' will not pan out and oil will soon fall.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not own shares of any equity 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.
Currant trend is just fulfilling some chart requirements, so current move will be more likely to proven as a short term trend and medium or long term bull run is still doubtful, therefore, any trend turn-around can be found if and only after getting WTI Above $ 63 and $66 for minimum three continues closings, otherwise, bear run will take place again.
Any decrease in production/ increase in price would be a good thing for the world. 35 years ago, when we were "investing" in Star wars and a massively bloated military, we should have been working toward renewable, cleaner energy. We are not only 4 decades behind the times, but getting worse at the current rate.
OPEC has noticed the success of the FED in pumping up prices with talk and is doing the same thing. Oil price will have to exceed $60.00 per barrel and stay there before my company resumes production. I don't think we'll get to $60 based on fantasy.