Good Tidings Await Oil In 2020: 5 Soaring Energy ETFs

After a decent 2019, oil prices had a brilliant start to 2020, thanks mainly to the escalating tensions in the Middle East. The United States Oil Fund (NYSE:USO), LP USO and United States Brent Oil Fund, LP ( (ASX:BNO) have added 2.7% and 3.6%, so far, this January. This followed the yearly gains of 27.9% and 33.6% for the two ETFs, respectively.

Let’s see what could keep oil and energy stocks and ETFs steady this year.

U.S.-Iran Tension Likely to Prevail in 2020

The latest bonanza came after tensions flared up between the United States and Iran. A U.S. drone strike near the Baghdad international airport Iraq Attack: Sector ETF Winners and Losers ).

The United States and Iran have been at loggerheads for about one-and-a-half years now. As a result, “Saudi Arabia’s energy facilities as well as foreign tankers in and around the Persian Gulf have been the target of several attacks over the past year -- a region that includes OPEC’s five biggest producers,” per Bloomberg. These attacks were supposedly carried out by Iran. And the aftermath of the latest U.S. strikes has bolstered the possibility of more attacks.

Also, with the two Middle East countries’ (Iraq and Iran) joint oil output being more than 20% of the total OPEC output (according to data compiled by Bloomberg ), higher chances of supply disruption has come into play, pushing up oil prices. We expect the simmering U.S.-Iran tension to act as a tailwind to oil prices this year.

Expansion in OPEC Output Cut

The OPEC group and allies inked a deal in mid-December to deepen production cut by effectiveness of the OPEC output cut . J.P. Morgan, in fact, went on to forecast that the oil market will be in a deficit in 2020 by 200,000 bpd.

Expectations of a recovery in oil prices in 2020 boost hopes for better capital spending by upstream companies. This, in turn, will benefit the oil services stocks too as these companies 4 Sector ETFs That Beat the Market in Q4 ).

Receding Global Growth Worries

Ebbing U.S.-China trade tensions, ample policy easing in major developed and emerging economies, and lesser uncertainties related to Brexit could prop up global growth and spur demand for this liquid commodity. The IMF expects the global economy to recover in 2020 .

Dovish Fed

The Fed has also hinted at no rate hikes in 2020, which could keep the dollar strength in check. With most commodities priced-in in the greenback, such Fed moves would be beneficial for commodities (read: Fed to Not Hike Rates in 2020: ETF Areas to Shine ).

Investors should note that research firm Goldman Sachs upped its 12-month commodity returns projection by 9.1% from energy.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

What’s Cooking Up for Shale Drillers?

Having said all, we would like to note that surging U.S. production is still a concern for 2020.The U.S. output scaled up to down 26% from the year-ago level, per service firm Baker Hughes.

Many market watchers are betting big on this slowdown in U.S. output growth. Shale drillers have 1.1 million bpd this year, from the previous year’s 1.6 million bpd.

Energy ETFs That are in Rallying Mode

Against this backdrop, below we highlight a few energy ETFs that are gaining momentum lately.

S&P Oil & Gas Eqpt & Services SPDR XES — Up 15.5% in the past month

Unconventional Oil & Gas Vaneck ETF FRAK — Up 13.9%

Oil Services Vaneck ETF (CA:OIH) — Up 11.4%

Infracap MLP ETF AMZA — Up 12.0%

DWA Energy Momentum Invesco ETF (HM:PXI) — Up 9.4%

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

Zacks Investment Research

Written By: Zacks Investment Research