With commodities rising, some investors are revisiting the asset class. Another way to gain commodities exposure is via commodities-linked equities. In the oil patch, that can include oil services stocks and the related exchange traded funds, such as the iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ).
IEZ has recently been surging, gaining more than 8% over just the past week. The U.S. energy sector have been able to easily access and raise capital, which has led to higher oil production capacity within the industry. Furthermore, improving technologies, notably hydraulic fracturing or fracking technologies, have allowed the U.S. energy sector pump out more oil and achieve profits even as crude prices dipped below their most recent cyclical peaks.
“Commodity prices are riding the wave of global economic momentum,” said BlackRock in a recent note. “Healthier demand, tighter inventories and OPEC production cuts have corrected the supply glut that was depressing oil prices, and geopolitical tensions have also provided support. Prices have now bounced back from 2016 lows; however, increased U.S. shale oil production is likely to put a lid on further appreciation, we believe.”
Increased Demand for Commodities, Drawn Down Oil Inventories
The $224.88 million IEZ tracks the Dow Jones U.S. Select Oil Equipment & Services Index and holds 35 stocks. The fund allocates over 26% of its combined weight to Schlumberger (NYSE: SLB) and Halliburton (NYSE: HLB), the world’s two largest providers of oilfield services.
The expanding global economy has increased demand for commodities and drawn down oil inventories. For instance, according to the Energy Information Administration, U.S. crude stockpiles have declined for the past 10 consecutive weeks and are now at their lowest level since 2015. Oil services stocks are often more correlated to oil prices than their integrated peers.
“Commodities have historically performed better in later parts of the economic cycle as demand for resources outpaces supply. We prefer commodities exposure via related equities and debt. Both have lagged the recovery in underlying spot prices. Major producers’ capex discipline and sharper focus on profitability are encouraging,” according to BlackRock.
Other oil services ETFs include the VanEck Vectors Oil Service ETF (NYSEArca: OIH), PowerShares Dyanmic Oil & Gas Services Portfolio (NYSEArca: PXJ) and SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES). These services ETFs include big names like Schlumberger and Halliburton that provide the necessary equipment to drill and maintain oil producing operations
For more news on oil ETFs, visit our energy category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.