The energy sector has been a disappointment for much of 2023. Now, however, it is looking interesting amid a recent surge in crude oil prices. That rebound has some oil market observers pondering the possibilities of $100 per barrel in the months ahead.
Some exchange traded funds, including those with compelling income streams, are reflecting suddenly bullish expectations in the energy patch. For example, the VanEck Energy Income ETF (EINC) is higher by 2.51% over the past week. EINC, which follows the MVIS North America Energy Infrastructure Index, offers investors the benefit of a 30-day SEC yield of 4.21%, confirming strong income attributes.
Solid energy sector fundamentals support that above-average dividend yield. There is a compelling supply/demand outlook.
“In June, global oil demand reached 103 million barrels a day, a new all time high. But on top of that, the recent crude price rally has been supported by strong production cuts from OPEC, particularly Saudi Arabia,” noted Martijn Rats, Morgan Stanley’s Global Commodity Strategist. “In April, Saudi Arabia still exported 7.4 million barrels per day of crude oil. By August, this had fallen to just 5.4 million barrels a day, that is an unusually sharp drop in a very short space time. On a 100 million barrel per day market, that may not look like much, but this is enough to drive the market into deficits, cause inventories to decline and prices to rise.”
Other Factors Favoring EINC
Home to 31 stocks, EINC focuses primarily on midstream energy names. This is a segment of the energy sector that typically isn’t as correlated to oil prices as integrated oil companies or exploration and production firms.
The benefit there is that EINC offers more income than many exploration and production equities. Not only that, the VanEck ETF can also sport favorable volatility traits relative to the broader energy patch. That’s saying something because energy commodities and equities are often volatile assets. Additionally the fund does derive some benefit from rising crude prices and favorable supply/demand dynamics.
Regarding the latter point, domestic oil production is retreating while OPEC members, at Saudi Arabia’s behest, are also reducing output in an effort to support higher prices. Add it all up and the stars could be aligning for assets such as EINC.
“Putting this all together creates a favorable outlook for energy equities and that is where our true conviction lies,” concluded Morgan Stanley’s Rats. “At the start of the year, we argued that earnings expectations for the energy sector were high and that market sentiment was already bullish and that valuations were stretched. After two years of rating the sector attractive, we downgraded our sector view back in January.”
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