Things are starting to turn around for oil and gas giants, with global energy prices finding much-needed support, and the sector beginning a rally yet again, suggests Todd Shaver, editor of the Bull Market Report.
With Russian oil still out of the mainstream, rate cuts by the Federal Reserve, and production cuts by OPEC, the stars are aligning perfectly for a rally in the energy sector, which was largely flat in 2023, following a massive rally the prior year.
There are few better ways to ride this trend than the premier exchange-traded fund with exposure to pure-play energy producers, the iShares US Oil & Gas Exploration & Production ETF (IEO).
The fund allocates 80% of its assets to replicating the Dow Jones Oil Exploration & Production Index, with the remainder comprising swaps, futures, options, and cash, which forms a nice hedge and helps generate alpha during periods of particularly high volatility.
Both in the short- and long-term, the energy industry — and by extension, the ETF — have substantial tailwinds that are beginning to be realized.
In the short run, there are the US inventory replenishments to grant much-needed support, which some analysts believe could propel crude oil to $100-plus levels. In the long run, natural gas will be playing an outsized role in the global transition away from fossil fuels.
We don’t think that the Strategic Petroleum Reserve (SPR) is as big a deal as some energy analysts feel. But its rise and fall certainly has the press in a tizzy. The world produces and uses 100 million barrels of crude oil a day. The SPR is 730 million barrels when full, but it was at 350 million barrels as of the end of 2023. It’s not a drop in the bucket, but it’s not as big as the Street thinks it to be.
With sanctions on Russia unlikely to be lifted any time soon, and the Middle East becoming a point of geopolitical friction with multiple players, it is fair to assume that oil and gas prices will continue to remain elevated for the foreseeable future. Even with renewed investments in new wells and drilling, production growth will only start to outpace demand growth sometime after 2027.
There are few better ways to ride this trend and make the most of these tailwinds than the iShares Oil & Gas ETF, given its focus on quality picks, and its concentration in a handful of stocks such as ConocoPhillips (COP), EOG Resources (EOG), and Pioneer Natural Resources (PXD).
Finally, its extensive track record extending to over two decades — and an expense ratio of just 0.40% — make it a great way to invest in the energy business, without picking one stock out of all the ones that exist.