After posting a three-month low last month, WTI crude oil prices have been making a comeback as the agreement on Greek debt appears to be set, which has put some strength back in the euro and weakness in the dollar. Somewhat better economic news is also helping push oil back to the mid-$90s/barrel range.
Oil got another boost over the holiday weekend from a forecast in Barron’s predicting $150/barrel by the end of the second calendar quarter of 2012. Growth of demand from developing markets, combined with a tight supply are the main drivers of the steep predicted rise. Despite the notion that the “bulls may have been too bullish” we have looked through our list of mutual funds and exchange-traded funds which we think will benefit the most from the upside in oil. Other leveraged funds exist, but we stuck with the volume and safety parameters in mind.
A price increase of this magnitude suggests that mutual funds and ETFs that hold substantial assets in exploration & production or oil field services stocks could be positioned for more growth. For comparison purposes, we’ve selected the Oil Services HOLDRS ETF (AMEX: OIH) and the ProShares Ultra Oil & Gas ETF (NYSE: DIG). We’ve looked at several funds and ETFs: PowerShares S&P SmallCap Energy ETF (NASDAQ: PSCE), SPDR S&P Oil & Gas Exploration and Production ETF (NYSE: XOP), PowerShares Dynamic Oil & Gas Services ETF (NYSE: PXJ), Fidelity Select Natural Resources (FNARX), and Putnam Global Natural Resources (EBERX).
The Oil Services HOLDRS ETF (NYSE: OIH) holds about $2.9 billion in assets. Year-to-date, the fund has returned 9.13% and its trailing three-month performance is -6.96%. OIH holds just 14 stocks, all of which are primarily oil field services companies.
The ProShares Ultra Oil & Gas ETF (NYSE: DIG) holds about $342 million in assets, and its year-to-date return is 22.70%, while its trailing three-month performance is -9.87%. DIG is a leveraged ETF that seeks to return 200% of the performance of the Dow Jones U.S. Oil & Gas Index.
The PowerShares S&P SmallCap Energy ETF (NASDAQ: PSCE) holds $107 million in assets. Year-to-date returns total 17.50%, while the trailing three-month return is -6.25%. The fund holds just 20 stocks, with a mix of E&P and services companies. Its year-to-date return is nearest to that of DIG, and its three-month performance is about 50% better.
The SPDR S&P Oil & Gas Exploration and Production ETF (NYSE: XOP) holds about $603 million in total assets, and posts a year-to-date return of 13.72%. It’s trailing three-month return is -7.8%. Year-to-date this fund is performing about 50% better than OIH.
The PowerShares Dynamic Oil & Gas Services ETF (NYSE: PXJ) holds $245 million in total assets and has a year-to-date return of 13.51%. The trailing three- month return is -6.31%. The fund’s largest holding is Halliburton. Compared with OIH, the year-to-date return is about 48% higher.
The Fidelity Select Natural Resources (FNARX) fund holds total assets of $1.8 billion. The fund’s year-to-date return is 8.72% and its trailing three-month return is -6.04%. Chevron Corp. is the fund’s largest holding, while Halliburton is its largest services holding. Compared with DIG’s year-to-date return, the fund is performing less than half as well.
The Putnam Global Natural Resources (EBERX) fund holds total assets of $471 million. The fund’s year-to-date-return is 8.14%, and its trailing three-month return is -1.93%. It’s single largest holding is Exxon Mobil Corp., while Schlumberger Ltd. is its largest services holding. This fund also trails the returns of DIG by more than half, although its three-month performance is substantially better.
You will probably notice that the United States Oil (NYSE: USO) exchange-traded product is not on this screen despite it being the closest oil-tracking ETF for the price of oil. The rolling nature of front-month futures expiring and the lack of overnight tracking all eliminate this from even being a top tracking mechanism in general.
Oil field services stocks, as a group, have performed better than E&P stocks primarily because natural gas drilling has increased onshore in the US, and more offshore drilling is getting lined up offshore of Africa. These stocks will get another boost when (if) work begins in earnest in Iraq.
E&P stocks benefit from higher crude prices, but only up to a point. When gasoline pump prices get to be in the $4-$5 range in the US, consumption decreases. When crude prices get threaten to hit $125/barrel, consumption in emerging nations can stall.
That doesn’t change the fact that currently supply dominates pricing. And that is unlikely to change — at least for a very long time.