Exchange traded funds (ETFs) tracking the energy sector were hit on Friday, after news emerged that the Organisation of Petroleum Exporting Countries (OPEC) and Russia are in discussions about increasing oil production once again in response to soaring prices.
According to Reuters, the discussions were triggered by complaints from US President Donald Trump that the oil price has soared too high and was being propped by artificially by OPEC, after Brent Crude hit its highest level since late 2014 at $80.50 this month. Saudi Arabia and Russia are said to be considering raising production by one million barrels a day, according to sources quoted by Reuters.
The energy ministers of Russia and Saudi Arabia, Alexander Novak and Khalid al-Falih, have said the main aim for the move would be to calm consumer worries about soaring prices, but stressed any move would be gradual.
However, the news still sent the price of Brent Crude plunging some 3% to $76.44 a barrel, its lowest level since 8 May and a 2.6% decrease for the week overall.
Impact on energy ETFs
Unsurprisingly, this slump in oil prices has hit ETFs tracking the sector, which have seen a phenomenal run over the last month until now.
According to TrackInsight data, Energy Stock ETFs fell back 1.9% on Thursday 25 May, while the largest ETF tracking energy stocks, the €16.5 billion Energy Select Sector SPDR Fund, fell some 3% on Friday following the news reports.
Other key funds in the sector also suffered losses: the SPDR Oil & Gas Equipment & Services ETF fell 5.2% on the day, the PowerShares Dynamic Oil & Gas Services Portfolio was down 4.6%, and the VanEck Vectors Oil Service ETF also traded 4.6% lower.
Should investors be concerned?
Over the past month to 24 May, investors in energy sector ETFs have been rewarded for their patience, after months of underperformance, as soaring oil prices finally raised returns for the year to date to 7.4%.
For many, this will be enough to pull out of the sector if there is a threat of lower oil prices on the horizon. Already on Thursday money began leaving the sector, TrackInsight data shows, with outflows of €134 million. Over the year to date, however, cumulated inflows still remain positive at €1.3 billion.
However, investors’ fears about plunging oil prices may be unfounded, since cutting production by one million barrels per day would not, in reality, create such a big surplus.
The recent astronomical rise in oil prices has been driven by the fact that the current cuts are larger than 1.8 million barrels per day originally agreed by OPEC. This is because the falling oil output from crisis-hit Venezuela has in reality increased the production cuts to some 2.7 million barrels per day, Russia’s energy minister has said.
In either case, markets have some time to digest the news. The final decision will not be made until OPEC and non-OPEC ministers meet in Vienna on 22-23 June.
