With oil prices climbing following the most recent OPEC meeting, many energy investors are turning to oil ETFs now. That's why we're bringing readers the top oil ETFs to watch now...
Crude oil prices have jumped above $50 a barrel after the oil cartel agreed to a production cut last month.
WTI crude oil is currently trading at $50.66 a barrel, up over 15% on the year. And Money Morning Global Energy Strategist Dr. Kent Moors expects oil prices to head even higher in 2017. As long as the OPEC deal is implemented as planned, Moors predicts oil prices will rise to $60 a barrel in Q1 2017.
On top of that, President-elect Trump has said he wants to make "America energy independent" by encouraging drilling across the country.
Before we get to our oil ETFs list, here's why oil ETFs are so popular right now...
Why Oil ETFs Are So Popular Right Now
Oil ETFs allow investors to benefit from the oil trade without having to wade into many of its complexities.
Oil ETFs can be traded just like stocks. ETF investors won't need to worry about purchasing stocks on foreign exchanges or making risky trades in the futures market. Oil ETFs also provide investors with broad exposure to the oil market, which lessens the risk of an individual stock not performing as well as expected.
You can even buy ETFs that mirror the performance of oil prices. This is great for investors who want in on crude oil but aren't interested in speculating on futures prices or physically purchasing oil to sell.
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Oil ETFs also let investors be selective about the sorts of oil companies they invest in. The "Big Oil" companies, like Exxon Mobil Corp. (NYSE: XOM) or Royal Dutch Shell Plc. (NYSE: RDS.A), have huge balance sheets and exposure to other commodities, like natural gas. This means an investor interested only in oil drilling companies can find an ETF of only small-cap oil drillers.
Oil ETFs wouldn't be nearly as attractive if oil prices weren't set to rise. But there are several reasons why oil prices are heading higher in 2017...
Why Oil Prices Will Climb in 2017
Money Morning's oil price prediction for 2017 is bullish for three reasons.
The first is the latest OPEC agreement to cut oil production.
OPEC agreed to cut oil production for the first time since 2008, which has injected optimism into the oil markets. The deal cuts the cartel's oil production by over a million barrels a day and sets its target production level at 32.5 million barrels a day.
Moors expects the deal to allow the cartel to establish a price floor of around $50 a barrel. He also expects it to keep the oil price more stable.
The second reason is an expected increase in demand.
The U.S. Energy Information Administration reports it raised its 2017 world demand forecast for oil by 1.49 million barrels a day to a total of 19.68 million barrels per day.
Increased global demand for oil will lead to higher oil prices as oil production is being cut by OPEC and Russia and has been recently declining in the United States.
The third reason is the election of Donald Trump to the presidency. His proposal to make America energy independent through reducing restrictions on oil drillers could allow oil drilling companies to become more profitable. That could be good news for some of the oil ETFs on our list.
With oil prices set to rise, these are some of the biggest oil ETFs on the market...
Our Billion-Dollar Oil ETFs List
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We've found two oil ETFs with more than a billion dollars in holdings. Each of these ETFs offers something a little bit different for oil investors, too.
The VanEck Vectors Oil Services ETF (NYSE Arca: OIH) is a billion-dollar oil ETF. OIH closely tracks the MVIS U.S. Listed Oil Services 25 Index. This includes the largest and most liquid U.S. companies with at least half of their earnings from oil field services.
Larger oil firms are much more likely to endure over the long term. The risk of bankruptcy, as well as the possibility of being acquired, is much greater for smaller companies than for larger ones. With volatile oil prices, smaller firms are at risk of disappearing with a dip in oil prices. This fund gives you exposure to the companies that will be around for the long haul.
The top holdings of OIH are Schlumberger Ltd. (NYSE: SLB) and Halliburton Co. (NYSE: HAL). Since the start of the year, SLB is up over 20%, and HAL is up nearly 60%. These oil behemoths could drive up the price of OIH as oil booms next year.
OIH currently trades at $34.54, up more than 20% over the last three months.
Another popular pick is First Trust North American Energy Infrastructure Fund (NYSE Arca: EMLP). EMLP holds a basket of 69 equities, widely dispersed among U.S. and Canadian energy providers.
EMLP was the very first oil ETF to reach $1 billion in assets. Morningstar dubbed it the best "equity energy" ETF in 2014 due to its one-year total return of nearly 24%.
The majority of EMLP's holdings are midstream master limited partnerships (MLPs). These firms don't have the same exposure to lower oil prices as other companies since they get at least half their total revenue from storage and transportation infrastructure.
EMLP also benefited from one of last year's biggest energy mergers, when Energy Transfer Partners LP (NYSE: ETP), a large EMLP holding, bought Regency Energy Partners in late April. The $18 billion transaction resulted in Transfer Partners becoming the second-largest publicly held MLP.
An oil ETF like EMLP could provide some stability if you expect a volatile market.
EMLP currently trades at $24.86 per share, up more than 23% on the year.
There are plenty of other ways to invest in the energy sector, but it takes an expert to help unwind many of the complexities of the market. Check out which energy sector our energy expert - Dr. Kent Moors, Money Morning's Global Energy Strategist - says President-elect Trump will impact the most. You might be surprised...