Jérémie Poland
THE iShares US Oil & Gas Exploration & Production ETF (BATS:GOOSE) is holding strong, and we think it’s because of the news that markets initially didn’t like, namely the OPEC+ supply cut deadlines published about a month ago. With supply considerations now less volatile and demand having essentially stabilized and experienced for several months in a higher rate environment, the oil price situation (CL1:COM) it’s not so bad. Additionally, there are geopolitical concerns looming on the horizon that create an upside option. Even if we neglect the IEO, we overweight certain oil selections.
IEO Breakdown
In our latest cover, we focused on supply dynamics and how OPEC+ could play into planned U.S. oil stockpiling. The idea is that since the United States would have to build up stockpiles, this would be the This is the best time to release some of the supply reduction pressures on those members who were a little more desperate to get oil on the market to give them some relief. The big players like Saudi Arabia were going to continue their cuts even though they had become voluntary.
We thought maybe this was temporary, but it actually reflected a change in direction where, at the request of the United Arab Emirates in particular, the end of supply cuts it was necessary to delimit. Given some internal conflicts within OPEC+, they have decided to set their overall timetable, which will see oil return to the market in stages. The major cuts would continue until 2025, but other cuts could begin to expire imminently.
This initially caused a rout in the oil market, which did not like that some tranches of the cuts were ending almost immediately, but after a week or so the markets felt more comfortable and oil has now made clear progress towards above $80 per barrel in Western indices.
The IEO ETF tracks a somewhat idiosyncratic index that is, of course, linked to the oil commodity situation. There is no Exxon Mobil (XOM), and there are 46 farms. This more complex index makes the expense ratios a little high for our liking, at 0.4%.
Sectors (iShares.com)
Other choices are a mix of non-commodity exposures and stocks like refineries that are reliant on narrowing spreads, which are subject to the supply dynamics of industrial capacity to refine more than raw materials. underlying raw materials, although exposed to dislocations of different qualities of crude. However, 76% of the ETF is exposed to the price of oil.
Conclusion
With a defined supply situation, this means that changes in demand are the only thing that will be new in the information set, aside from possible geopolitical effects that could come from Russia. Developments in Russia carry upside potential. Russians protest that Ukrainians used American missiles to attack targets in Crimea. These are quite important strategic targets the destruction of which could degrade the performance of precision munitions guided by satellites. In addition, terrorist attacks in Dagestan are attributed to Western subversion. This could be the prelude to some sort of escalation that could lead to disruptions in the oil market. Even a more concerted effort by the Russians to keep their resources from the West in an oil and resources market that is not perfectly integrated could be enough to raise prices and put additional inflationary pressure on the West. .
Of course, there is also the continuing threat to the Strait of Hormuz and the impact this may have on the smooth functioning of global oil markets.
With a P/E below 10x for the iShares US Oil & Gas Exploration & Production ETF, there are clearly some bargains in the market. However, we prefer to be selective in these markets because there are usually ways to obtain an additional margin of safety to guard against the inevitability of a cyclical and somewhat unpredictable evolution of oil, even if a more supply situation defined OPEC+ has been useful in reducing uncertainty. Our choice remains Aker ASA (OTCPK:AKAAF) which is primarily exposed to oil but also has an industrial technology aspect and is an example of one of our high conviction ideas which are now almost all exclusive to the sector Value laboratory investment group.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these actions.
