Unless you’ve been living under a rock for the last seven months or so, it shouldn’t come as a shock that oil prices are in the dumps.
After peaking back in summer of 2014, oil prices have plunged about 46% and reached a six-year low back in March. The huge fall in oil prices was due to a number of factors leading to a not-so-favorable supply/demand equation for the fossil fuel.
One of the biggest factors in that equation was oil cartel OPEC and its unprecedented decision to keep the rigs pumping.
Well, it seems like oil prices may finally be having the last laugh on the cartel.
Analysts have now surmised that OPEC maybe be hitting a snag with regards to exports and production. This news, plus falling rig counts in the U.S., could finally mean that oil prices are set to rise in the second half of the year.
For portfolios, now could be the best opportunity to snatch up oil and energy-related investments before the recovery really begins.
Several Positives For Higher Oil Prices
Here in the United States, the recent oil boom was built on technology. It takes some serious technological know-how to frack a well. Unfortunately for OPEC, a lack of technology could be their undoing in the recent oil war.
According to a new Thompson Reuters report, OPEC is slipping in its efforts to keep production up above a critical 31 million barrels per day threshold. Based on what the group of nations refines and keeps for itself, that amount of oil production is what it needs to be able to export. Reuters’ data showed that OPEC’s May exports registered in at 22.34 million barrels per day. That’s more than a million less that than what was recorded in March for the cartel.
That means there’s less oil going out of OPEC’s front doors — sans Saudi Arabia. But Reuters reports that Saudi Arabia even had to turn down several buyers in order to feed its own refineries.
This takes care of one side of the supply equation.
The other side — here at home — is also beginning to show some weakness. The number of drilling rigs in operation continue to fall as the number of uncompleted wells on backlog get finished. While oil prices remain high enough to continue drilling in key areas — like the Bakken, Eagle Ford, and Permian basins — the rest of emerging onshore and deepwater locales aren’t economical.
All in all, the drop in rig counts should finally decrease supplies of U.S. produced crude oil during the second half of this year according to Energy Information Administration.
The final decrease of oil glut should help push oil prices up and out of their current trading range.
Time To Bet On Rising Oil Prices
Given that we may finally be seeing the end of the supply glut, higher oil prices could be on the horizon. Investors looking to make a play on oil may want to jump in now. The PowerShares DB Oil ETF (DBO) is a prime way to make that play.
The $620 million ETF tracks the DBIQ Optimum Yield Crude Oil Index Excess Return. Basically that’s a fancy way of saying the fund tracks West Texas Intermediate (WTI) oil futures contracts and uses a rolling-strategy to limit the risks of contango. The excess return portion comes from its holdings of U.S. treasuries which are used as collateral for the futures contracts it owns. As expected, the ETF has been a dog since oil prices have cratered.
But it could be a great bet as oil prices rebound, and the optimum rolling strategy has proved its weight. DBO has managed to outperform other oil ETFs, such as the iPath S&P GSCI Crude Oil TR ETN (OIL). Expenses for DBO run 0.78% — or $78 per $10,000 invested.
If oil futures aren’t your thing, then the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) might be a better portfolio fit. XOP tracks a who’s who of shale and offshore energy firms — equally weighted to make sure larger firms don’t overpower the index. Top holdings include Rosetta Resources (ROSE) and Clean Energy Fuels Corp. (CLNE).
That equal weighting is boon in great times — and rebounding markets. It’s less helpful when the sky is falling. XOP has basically been halved as oil prices tanked. But as they rise again, the E&P focused ETF should grow much larger than large-cap weighted energy stock funds. It’s like a leverage play without the actual leverage. Expenses for XOP run a cheap 0.35%.
The Bottom Line: We’re finally beginning to see signs that supplies — from both OPEC and the U.S. are dropping. That’s great news for rising oil prices.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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