OPEC Surprises With Production Cut: Energy ETFs Soar

The Organization of the Petroleum Exporting Countries (OPEC) unexpectedly agreed to cap its oil production for the first time in eight years at a meeting in Algiers, infusing optimism into the energy sector. This is especially true as oil price jumped almost 6% immediately after the news. This would be the first historic deal between the OPEC and non-OPEC producers in over a decade (read: Oil ETFs in Focus as OPEC Meets).

Proposed Deal

The 14-member cartel proposed to cut oil output by about a million barrels per day to 32.5–33 million barrels per day from the current 33.2 million barrels per day. Saudi Arabia, the largest oil producer, will likely curtail its production by 350,000 barrel a day while the full details of output cut by each country will be finalized in the next meeting on November 30, in Vienna.

Investors should note that Iran, Libya and Nigeria will not be part of the agreement and will continue to increase their production by as much as 1.5 million barrels a day collectively.

As per the International Energy Agency (IEA), the production cut of 200,000 to 33 million barrels per day will have a limited impact on global supply and markets are unlikely to rebalance until the second half of 2017. But if OPEC cuts 700,000 barrels per day of oil, then it would take care of the global supply glut issue as soon as the end of this year.

The move would be a huge boon to the energy sector, as it will end the two-year crude-oil rout and stabilize the oil market. It will revitalize growth in the battered energy sector and lift the economies of the oil-rich countries like Russia and Saudi Arabia (read: Prepare for a Trump Presidency With These Stocks & ETFs).

Global Oil Stocks Surge

The news sent the global energy space into deep green yesterday with small cap stocks like Denbury Resources (NYSE:DNR) and SeaDrill Limited (SDRL) leading the way, surging 21.3% and 19.7%, respectively. U.S. oil heavyweights – Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) – rose 4.4%, 3.2% and 7%, respectively, while the major oilfield services providers – Schlumberger (SLB), Halliburton (NYSE:HAL) and Baker Hughes (BHI) – gained nearly 4%.

In fact, energy companies in the S&P 500 climbed 4.3%, representing the largest gain for the sector since January 14. The robust one-day gain has brought energy companies into positive territory for the month of September.

Meanwhile, European oil majors also saw strength with Statoil (OL:STL) (STO) rising 4.8%, followed by increases of 3.7% BP plc (LON:BP), 3.4% for Royal Dutch Shell (LON:RDSa) plc (RDS-A) and 2.8% for Total SA (PA:TOTF) (TOT). Other international players such as Petrobras (PBR) and PetroChina (PTR) gained 4.9% and 3.2%, respectively.

ETF Impact

The delightful trading in the stocks has sparked off a strong rally in the overall energy ETF space as well. In particular, SPDR S&P Oil & Gas Equipment & Services ETF XES, PowerShares S&P SmallCap Energy Fund PSCE, and PowerShares DWA Energy Momentum Portfolio (HN:PXI) stole the show, surging over 7% on a single day.

Below we profile these ETFs in detail and discuss some of the specifics behind their recent rally (see: all the energy ETFs here):

XES

This fund provides exposure across 37 securities by tracking the S&P Oil & Gas Equipment & Services Select Industry Index. None of the firms accounts for more than 3.8% of the total assets. The product puts heavy focus on equipment and services at 65.3%, while drilling companies account for the remainder. The fund has amassed $210.2 million in its asset base and an expense ratio of 0.35%.

PSCE

This fund provides exposure to the energy sector of the U.S. small cap segment by tracking the S&P Small Cap 600 Capped Energy Index. Holding 31 securities in its basket, it is highly concentrated on the top three firms with a combined 41.7% share while other firms hold less than 4.8% of total assets. From an industrial exposure, equipment and services make up for half of the portfolio while exploration and production takes 35% share. The fund is less popular with AUM of $44.4 million and charges 29 bps in fees per year.

PXI

This fund tracks the DWA Energy Technical Leaders Index and holds about 35 energy stocks having positive relative strength (momentum) characteristics. It is pretty spread out across securities as each holds less than 6.3% of the assets. Here, about two-thirds of the portfolio is dominated by exploration and production. The product has managed $118.3 million in its asset base while charging 60 bps in annual fees (read: 3 Energy ETFs at 52-Week Highs on Huge Inventory Drop).

Other biggest gainers were SPDR S&P Oil & Gas Exploration & Production ETF (V:XOP) , iShares U.S. Oil Equipment & Services ETF IEZ, VanEck Vectors Oil Services ETF OIH, PowerShares Dynamic Oil & Gas Services Fund PXJ and VanEck Vectors Unconventional Oil & Gas ETF FRAK that gained about 6% on the day.



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ISHARS-US OIL E (IEZ): ETF Research Reports

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PWRSH-DW EGY MO (PXI): ETF Research Reports

VANECK-OIL SVC (OIH): ETF Research Reports

PWRSH-SP SC EGY (PSCE): ETF Research Reports

VANECK-UNC O&G (FRAK): ETF Research Reports

SPDR-SP O&G EQP (XES): ETF Research Reports

PWRSH-DYN OIL&G (PXJ): ETF Research Reports

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