STOXX Europe Oil & Gas ETF Analysis

STOXX Europe Oil and Gas ETF Analysis including Facesheet

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The oil & gas industry is often described as the backbone of our global economy. Oil & gas are critical commodities for almost any producing enterprise across many industries. Because of their importance, these commodities are also highly politicised. Disputes over the property of oilfields have frequently been the reason for violent conflicts or even wars. The complexity of the industry and its global implications can fill an entire library with books. For the purpose of this article, we will only touch on the surface on all the political aspects.

The world’s largest oil & gas producing countries are the United States, Saudi-Arabia, Russia, Morocco, Iran, Canada, China and the UAE. In order to keep oil prices and supply as stable as possible, many leading oil producing countries founded the OPEC (Organization of the Petroleum Exporting Countries) in 1960. However, it is worth noting, that the OPEC has lost some of its impact in recent years. This is because other large oil producing countries such as China, US and Russia are not official members of OPEC.

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Current situation and crisis

The global oil & gas industry has traditionally been one of the preferred investment categories among investors. However, the recent trend to move away from fossil energies towards more sustainable energy sources, has put the future of the oil & gas industry into question. Additionally, the global pandemic made oil prices plunge to levels unseen before. On April 20, 2020, the benchmark for US oil prices even dropped below zero. Below, we will provide you with our thoughts on the industry, including a factsheet and brief review of one of the most prominent ETFs in this industry, the iShares STOXX Europe 600 Oil & Gas UCITS ETF.

The Oil & Gas industry

As briefly stated above, the current challenges of the oil & gas industry are manifold and more severe than ever. The most critical challenges are certainly the effects of the current pandemic and the trend towards green and sustainable energy sources. To be prepared for both the transition into renewable energies and a world after the pandemic, nations as well as enterprises must develop a solid strategy.

The transition to renewable energies

For instance, Saudi Arabia is already preparing for a “post-oil” era and investing heavily. As part of this strategy, Saudi Arabia went public with its oil giant “Saudi Aramco” – the world’s largest IPO in history in order to raise money to fund its post-oil era strategies. Additionally, large multi national enterprises such as shell are moving forward with their plans to adopt new energies and reduce their carbon footprint. The trend towards green and renewable energies will certainly be ongoing and change the way the industry operates. In the long run, this trend will inevitably reduce decencies on oil producing countries and enterprises. Experts and analysts expect global oil demand to peak in 2033, before demand will slowly but steadily decline.

The impact of the global pandemic

On the other side of the spectrum, the current challenges imposed by the global pandemic are also devastating to the industry. As a result of the sharp decline in oil demand, companies reacted with vigorous countermeasures. Many of the big enterprises cut their dividends, reduced costs and applied all kinds of emergency measures to deter as much damages as possible. While the oil demand kept at record lows during the year, there is still light at the end of the tunnel. For instance, Shell announced to increase their dividends again, after they reported better than expected numbers in their financial reports. Additionally, the current pandemic – as bad as it is – will eventually end. And as Winston Churchill once said – “never let a good crisis go to waste”.

STOXX Europe 600 Oil & Gas

The STOXX Europe 600 Oil & Gas index tracks the market performance of companies within the European oil & gas industry. Following the pandemic, the index lost more than -40 % of its value. It was a decline from almost 30 EUR to 17.67 EUR on October 1, 2020. Today, the index performance is still clearly negative on a year-to-day basis. Constituents include companies, such as Total, Royal Dutch Shell, BP or Neste, which are typical representatives of the industry. In our factsheet (see above), you will find additional details on the iShares STOXX Europe 600 Oil & Gas ETF, which tracks exactly this index.

iShares STOXX Europe 600 Oil & Gas UCITS ETF (DE)

Conclusion and outlook

As described above, the oil & gas industry is currently fighting a war at two fronts. One is the global trend towards sustainable and renewable energy sources. The other is the global pandemic. We believe, that the global pandemic can also prove as a chance for the sector to consolidate. We do actually expect some movement in the areas of Mergers and Acquisitions. As the pandemic leaves some enterprises with no revenues and high costs, they may become target of acquisitions.. Once the pandemic is over, those who weathered the crisis best, will get out even stronger and increase market shares.

However in the long run, the inevitable move to renewable energies imposes a more serious threat to the industry. Likely, some will not be able to handle this transition which happens in the next 10+ years. Within that time frame, oil & gas certainly has good chances to go back to previous heights before it will eventually decline. Since it is always tricky to pick single companies which may succeed, choosing an ETF of the industry is always a good option for investors.

Authors of this website may have invested or intend to invest in the financial instrument discussed in this article at the time of publication. Following our disclaimer, we would therefore like to point out that a possible conflict of interest exists here. Nevertheless, all our analyses are for information purposes only and should under no circumstances be interpreted as a recommendation to buy or sell. View our disclaimer for more information.