Yahoo Finance Saudi Pledges Extra Oil Output Cuts: 4 Sector ETFs to Win
Oil prices saw an uptick after the world's leading oil exporter, Saudi Arabia, decided to voluntarily cut its production by an additional million barrels per day, starting in July. The announcement came during an Organization of the Petroleum Exporting Countries and its partners (OPEC+) meeting, where no changes to planned oil production cuts were made for the rest of the year.
OPEC+, which supplies around 40% of the world's crude oil, reached a deal on output policy after seven hours of talks at its headquarters in Vienna and agreed to extend earlier cuts in supply through the end of 2024 by a further total of 1.4 million barrels per day. But Saudi Arabia's decision reduces the kingdom's output from around 10 million barrels in May to 9 million barrels per day. This move by Saudi Arabia sent ripples across global markets, influencing a rise in oil prices, per CNBC.
Market Response
Both benchmarks saw an increase of over 2% during early Asia trade on Monday. Market analysts had not widely anticipated the Saudi decision, but it reaffirmed Saudi Arabia's willingness to act unilaterally to stabilize oil prices, as observed by Bob McNally, the president of analysis firm Rapidan Energy, as quoted on CNBC.
Analysts Perspective
Global deficits are predicted to increase in the second half of 2023, and crude oil prices could exceed $100 next year, according to McNally. In a similar vein, Kang Wu, head of global demand and Asia Analytics at S&P Global Commodity Insights, anticipates the rise of global oil demand in the summer season to lead to a significant inventory draw, supporting higher oil prices.
Analysts from the Commonwealth Bank of Australia expect Saudi Arabia to deepen its cuts if Brent futures remain in the $70 to $75 per barrel range, or even drop below it. The uncertain market conditions and the potential for a looming recession could be indicators of an oil price drop below $70.
A Mixed Outlook
While some predict a gloomy picture of the oil market, citing weak demand from major consuming regions like China, the European Union, and the United States, others view Saudi Arabia's decision as a way to enhance the credibility of the cuts. However, the clear intent of the Saudis to protect oil prices unilaterally suggests a robust commitment to the oil market's health and stability.
Against this backdrop, it would be prudent to discuss ETF areas that tend to gain on rising crude prices as well as the ones that are likely to underperform.
Gainers
Oil and Gas – Energy Select Sector SPDR Fund (XLE)
It comes as no surprise that the oil and gas industry benefits directly from rising oil prices. As the cost of crude oil increases, oil producers enjoy higher profit margins, which translates into increased revenues. Additionally, oil companies involved in exploration, drilling, refining, and distribution witness a surge in their stock prices, leading to enhanced investor confidence.
Alternative Energy – iShares Global Clean Energy ETF (ICLN)
Increasing oil prices often stimulate investment and innovation in alternative energy sources. Renewable energy sectors such as solar, wind, and biofuels become more competitive when oil prices rise, as they offer cost-effective and environmentally friendly alternatives. Consequently, companies operating in these sectors experience increased demand, revenue growth, and greater market share.
Oilfield Services – VanEck Oil Services ETF (OIH)
Higher oil prices tend to spur increased activity in the oilfield services sector. Companies offering drilling services, equipment rentals, maintenance, and logistics support benefit from an upswing in demand. As oil producers strive to maximize their output and capitalize on favorable market conditions, they rely on oilfield service providers.
Steel – VanEck Vectors Steel ETF (SLX)
Steel producers underperform if oil prices crater. The industry supplies materials to build and expand oil drilling operations. Since an oil price rally can result in more capital expenditure by drillers, steel stocks should soar even higher.
Notably, many global oil and gas giants are expanding their investments in energy infrastructure of North Africa amid increased demand from the European nations. With the political backdrop stabilizing, North Africa has explored more avenues for investments in the energy infrastructure. This could be a tailwind for steel stocks.
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Energy Select Sector SPDR ETF (XLE): ETF Research Reports
VanEck Steel ETF (SLX): ETF Research Reports
iShares Global Clean Energy ETF (ICLN): ETF Research Reports
VanEck Oil Services ETF (OIH): ETF Research Reports
