Implications of OPEC+ cutting its oil output

How important is oil to the economy?

For all the negative press petroleum products get, make no mistake, they are vital to the preservation of the economy. Looking at the energy consumption as a case study for the transportation sector in the United States, according to the U.S. Energy Information Administration (EIA), “In 2021, petroleum products accounted for about 90% of the total U.S. transportation sector energy use. Biofuels contributed about 6%. Natural gas accounted for about 4%.” As for electricity used by mass transit systems? Less than a mere 1%. If you are still not convinced how important oil is for the global economy, consider Europe – where transportation is 94 percent contingent on oil. Without this non-renewable source of energy, the operation of cars, airplanes, buses and cargo ships would come to a grinding halt, as would numerous industries. 

Geopolitics and oil 

Suffice to say, 2022 will be remembered as the year of red-hot inflation, as well as unprecedented interest rate hikes, supply chain issues and an energy crisis exacerbated by the war in Ukraine. This combination of factors has hit the pocketbooks of everyday Americans, many of whom have already struggled to stay financially afloat following the COVID-19 pandemic. 

In a bid to ease the financial hardship of voters, President Biden went to the Kingdom of Saudi Arabia back in July to discuss various matters, including the importance of energy security and human rights - which some speculate is the reason for Saudi ‘retaliating’ with their decision to cut production. On the matter of oil, President Biden stated: “I’m doing all I can to increase the supply for the United States of America, which I expect to happen. The Saudis share that urgency, and based on our discussions today, and I expect we’ll see further steps in the coming weeks.” 

Fast forward to today, and clearly the opposite has happened leading Biden to threaten ‘consequences’ in response, the proximity to what might be a costly midterm election in November no doubt front of mind.

Oil market outlook 

The imbalance between supply and demand is at play and investors are paying attention. In the wake of the OPEC+ decision, hedge funds have rushed back into the oil market. Reuters reported earlier this week: “Hedge funds and other money managers purchased the equivalent of 62 million barrels in the six most important petroleum futures and options contracts in the week ending October 4th., according to regulator’s records.” U.S. banking giant Morgan Stanley updated their oil price forecast to $100 per barrel from their previous forecast of $95. Goldman Sachs also followed suit – predicting a similar increase for this year and next. The upward pressure is likely to remain for the near foreseeable future, as the world is still very much dependent on oil. 

For bullish investors wishing to express a view on the potential of oil, the following ETFs may be of interest. As a reminder, ETFs generally charge lower MER fees than that of mutual funds, as well as providing ease of access, liquidity and diversification benefits.  

OIH – (VanEck ETF Trust - Vaneck Oil Services ETF)

• AUM: $2.31B 
• Total Expense Ratio: 0.35%
• YTD Performance: +36.19%
• 3-Month Performance: +19.98%

PXJ – (Invesco Dynamic Oil & Gas Services ETF)  

• AUM: $27M
• Total Expense Ratio: 0.74%
• YTD Performance: +33.68%
• 3-Month Performance: +23.12%

GUSH – (Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares ETF)

• AUM: $752 M 
• Expense Ratio: 1.01%
• YTD Performance: +82.15%
• 3-Month Performance: +35.98%

Please note: This ETF provides leveraged exposure. This means that while your potential gains might increase, the inverse can also happen for losses. 

Please note this article is for information purposes only and does not constitute investment advice.