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Oil And Gas ETFs
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About Oil And Gas ETFs |
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Natural Resources (Oil and Gas) ETFs Overview and forecast
Few things have woken up the world's leaders like the energy issues of the last decade. The Kyoto Protocol, and the US's self exile from it, threw many of the global energy issues into the public arena. The global demand for green energy and reduction in pollution has clashed repeatedly with the huge demand for energy from countries like China and India. At one point China was building three coal fired power stations a week.
There are several other factors weighing on the energy index. The rise and crash of oil prices over the period 2007-2008 was a nasty shock to everyone in the markets. Investments in these areas received an unambiguous battering, reflected in the ETFs returns where 12 month returns crashed to depths of --79.24%, and only one ETF managed to escape a 50% reduction in returns. Even that one fund still took a hit of 22%.
The markets, in short, aren't too sure they want to suffer any more than they already have. They got pole axed by the futures market, which drove the oil prices up, then took a double whammy from massive falls later. The ETFs definitely don't need any more "help" from the markets. One ETF has a 52 week range from $131.08 in July 2008 to $16.93 as at April, 2009.
The Oil and Gas ETFs, naturally, have to hold big corporation stocks. To reflect an index, you can't leave them out. It just so happens that those are also the stocks and indices most severely mauled, in many cases. It's a matter of opinion whether the finance sector or the energy sector looks worse after the market demolition derby of 2008.
Short term (2 months)
Oil stock prices can move quickly, but the capital isn't really in the market at this point in time. One thing in favor of short term buying is volume of trade. These stocks trade heavily, and some selective buying and selling is definitely not going to be a total loss for experienced short term traders.
The other side to the coin is that oil is subject to short term volatility, and even if gas is relatively stable, (see below) in most stocks it's not the driver. Short term buyers can expect moves in both directions, and in the present economic climate no guarantees could be given of any sudden uncharacteristic, stability in ETF prices in this sector.
Medium term (2 years)
Oil is going to be affected by a raft of features as anti Greenhouse measures, electric cars, and other government initiatives take a grip on the domestic and global infrastructure. Oil, however, is also carbon, and carbon in a very usable form. Carbon chemistry drives the global economy in a much more literal sense than petroleum. Oil could well be reincarnated as a commodity, and perhaps, ironically, even become more valuable, as carbon nano fibres and new resins and polymers open up new markets. It shouldn't be assumed that the end of the internal combustion engine will be the end of oil.
This isn't going to happen in the medium term, but the medium term will, definitely, see the first basic but definite moves away from the oil based economics of the past. That will directly impact Oil and Gas ETFs, not necessarily for the worse, but the market can be expected to be nervous. Gas may benefit from this scenario, but the indices are weighted by oil, so index movement can be considered inevitable.
Long term (5 years)
The early stages of the transition period for oil, and the anticipated volatility in the sector, will be well under management, in five years. The oil and gas sector, in practice, will probably be under some pressure from rationalization and mergers, more than any other factor. ETFs will reflect a spectrum of changes, including the full impact of global carbon emissions trading on the markets, and their related impact on the corporate sector.
That's not necessarily a bad thing, by any means, for investors. As the inevitable shakeout occurs, stock values will move, considerably. The index will move with them. Big corporations can be predators as well as prey, and it can be assumed that institutional index investors will be watching any moves very carefully. Some self defence, as well as opportunism, will make the Oil and
Gas ETFs sensitive over this period.
Qualifiers to projections
Because the Oil and Gas sector is such a huge component of the major indices, it would be irresponsible to ignore the fact that these stocks are sensitive. They're instantly affected by major market forces. The holistic view of the market effectively works like Archimedes' Law of Displacement. When the main index moves, everything else gets displaced. Huge amounts of money are invested in the sector in various forms, but the main index outweighs even the oil stocks.
Institutions invest in indices for a better spread of risk and returns, and that applies both ways. The Oil and Gas ETFs aren't small funds, but they're inevitably affected by macro forces. A few large institutions repositioning, or even a sudden fluctuation in a major corporation can make a difference across the board.
Oil stocks, like the rest of the market, have been rising like a very cautious souffl? after the worst of the crash. That trend will continue unless anything else spooks the industry or the wider market. Ironically, gas, for once, could be the saving grace of the sector, because demand is excellent. China and India are both in the market and suppliers are working hard on meeting that enormous possible demand.
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Last Updated on: 2010-01-14 02:03:40 |
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