Energy And Power: Oil ETFs Provide Hints At The Global Energy Market's Troubles

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

The good news for oil investors is that the price of a barrel of oil has stabilized around the $35-$40 area, a far cry from the brief foray into negative territory in April. 

The bad news, well, everything else. Barring an unforeseen rally, 2020 will go down as the worst year for crude oil since 2014, and a recent analysis from the International Monetary Fund doesn’t anticipate prices breaking this range over the next 12 months. 

This bearish sentiment—the result of a supply gut, reduced global demand, and long-term shifts towards renewable energy—has benefitted the performance of two of Direxion’s inverse energy funds, the Direxion Daily S&P Oil & Gas Exploration & Production Bear 2x Shares DRIP, which is up about 30% since the start of August, and the Direxion Daily Energy Bear 2X Shares ERY, both Leveraged ETFs, which is higher by 40% in that same span.

Given the dim sentiment hanging over the future of oil, this trend may well continue through the rest of 2020 as the IMF predicts. However, with continued negotiations among OPEC nations and a national election coming up in the U.S., the landscape for crude is bound to experience further changes affecting not only the major oil concerns but the entire global energy landscape.

OPEC Litigates a Hazy Future for Oil

The current projection for crude demand is pretty dire, even among the characteristically bullish OPEC consortium. At a recent Energy Intelligence Forum, OPEC’s Secretary General Mohammad Barkindo could only provide an assurance of price stability even as the organization lowered its growth projection for daily oil demand through 2030 to just 1.1 million barrels a day.

But even that estimate may be too generous. A recent energy outlook report from BP plc. BP anticipates the world may have already passed peak oil, a sentiment that hasn’t done any favors for the company’s stock price, which is at a more than 25 year low. If the company’s projection is at all accurate, oil demand could be cut in half over the next 30 years.

The picture is similar for other oil expiration and production companies. Both Exxon Mobil Corporation XOM and Schlumberger Limited SLB are trading near a 20-year low, while Marathon Oil Corporation MRO shares are closing on a 30-year low. 

While there are a few oil companies that aren’t setting quite such bearish records, like Valero Energy Corporation VLO and Chevron Corporation CVX, none of the major energy concerns are on pace to exit 2020 in the green.

U.S. Energy Is the Wildcard

While the current projections for crude oil prices don’t offer much hope for energy bulls, there may perhaps be one bright spot on the horizon: the upcoming U.S. election. 

Current polling suggests 2020 may be a big year for the Democratic Party, which is looking to take both the White House and the U.S. Senate, adding to the party’s majority control in the House of Representatives. 

With that likelihood comes the distinct probability of a drastic change in U.S. energy policy from the current energy-friendly Trump administration. Should he prove the polls right, Democratic nominee Joe Biden has already indicated an intent to reinstate tighter fuel efficiency standards for automobiles as well as decreased reliance on natural gas. Additionally, Biden would likely reverse course on the current administration’s pledge to expand off- and on-shore drilling within the nation’s wildlife preserves while simultaneously pledging up to $1.7 billion over the next 10 years into renewable energy, a core priority of his campaign.

Although most of these plans have a longer time horizon, the possibility of lower U.S. energy production might be an encouraging cue for investors. Current readings from the U.S. Energy Information Agency show domestic energy inventories are historically high. The agency already anticipates a drawdown of this surplus through the winter months thanks to low prices and rising demand, and a Biden and/or Democratic Party win might spur greater speculation for higher-priced energy into the New Year 

An Alternative Future

Of course, these short-term factors don’t alter the larger trend away from fossil fuels and toward cleaner energy sources and renewable technologies. And while this doesn’t bode well for oil, there are other areas of energy better suited to benefit from these trends. 

Specifically, natural gas and utility companies. These companies have not suffered the same drop in demand as crude and have seen solid parity between inventories and demand, as evidenced by the resilience of the Direxion Daily Utilities Bull 3X Shares UTSL leveraged ETF. And while the possibility of stricter regulations on fracking could pose a challenge and skew the margins for natural gas firms, many of these companies have also expanded their energy portfolio to anticipate a shift in focus to renewables.

All told, the energy industry is in for significant changes through the next year regardless of where the global balance of power lies. Businesses and investors would do well to focus on these tide changes, lest they get swept under the changing energy landscape.

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DRIP as of 09/30/2020

ERY as of 09/30/2020

UTSL as of 09/30/2020

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The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.