Generic filters
Search in excerpt

An ETF for every investor.

HBNK

Horizons Equal Weight Banks Index ETF

Price
$21.26
$-0.12
-0.56%
NAV
$21.3800
$0.0727
0.34%

Benchmark

Sector Equity

Fact Sheet
Learn more about HBNK

SPAY

Horizons Short-Term U.S. Treasury Premium Yield ETF

Price
$27.12
$0.06
0.22%
NAV
$27.0495
$-0.0757
-0.28%

Active

Fixed Income

Fact Sheet
Learn more about SPAY

CASH

Horizons High Interest Savings ETF

Price
$50.15
$0.00
0.00%
NAV
$50.1464
$0.0066
0.01%

Benchmark

Fixed Income

Fact Sheet
Learn more about CASH
Explore All Products
Generic filters
Search in excerpt
Back to Media

Oil Price Roils: Is Now the Time to Invest?

Over the past five years, the price of crude oil has seen many price fluctuations. Investors have seen it go from lows amid a global pandemic, to a price spike spurred by supply constraints as a result of Russia’s invasion of Ukraine.

In the opening months of the year, the price of oil has been supported by the ongoing conflict in the Middle East spilling over into nearby shipping lanes, supply disruptions and initial indicators of robust oil market fundamentals. The extent of global shipping disruptions can be seen in the chart below:

Map showing impact to shipping of attacks in the Red Sea
Source: EIA

Supply & Demand

For the year-to-date, the North American benchmark West Texas Intermediate (WTI) oil has been trading between the US$70-US$76 range. Historically, oil prices tend to peak around April and May in line with demand for both gasoline from North America’s driving season and refined distillate products – which presents a potential buying opportunity for investors.

Price chart for West Texas Intermediate Crude oil over 5 years
Source: Bloomberg as at February 22, 2024

The world is facing a persistent shortfall in oil supply compared to anticipated demand. Current daily global oil consumption stands at around 100 million barrels per day (bpd), according to a research from J.P. Morgan. Following recent cuts from the Organization of the Petroleum Exporting Countries (OPEC), the disparity between the demand for oil and its production is projected to widen, which could bolster oil prices. The following chart illustrates the gap between oil supply and oil demand.

Chart showing the difference in crude oil supply versus demand
Source: J.P. Morgan

Energy Outlook

OPEC forecasts that world oil demand will rise by 2.25 million bpd this year and by 1.85 million bpd in 2025.

“Global economic growth remains robust. Further upside potential could materialize in all major Organization for Economic Cooperation and Development (OECD) and non-OECD economies,” OPEC said in its report.

Within OPEC, the world’s biggest oil producer is Saudi Aramco. Late last year, the Saudi company abandoned plans to boost oil production, which could have supply implications in the coming months, according to analysts.

In its most recent forecast, the International Energy Agency (IEA) indicated that world supply growth in 2024 will exceed demand growth. It increased its growth projections for demand by 180,000 bpd. Overall, the IEA’s demand forecast is lower than OPEC’s projection.

The U.S. Department of Energy’s Energy Information Administration (EIA) collects, analyzes, and disseminates energy data. It’s expecting crude oil prices to rise into the mid-US$80 per barrel range in the coming months with downward price pressures emerging in the second quarter of the year as global oil inventories increase.

You can read the latest short-term energy outlook here.

Deloitte Canada predicts the price of WTI will average around US$72 per barrel in 2024, which is almost 30% below the record price set in 2022 when Russia began its invasion of Ukraine. This could lead to Canadian oil companies spending less on their projects but consumers might see lower prices at gas stations. Canadian crude production jumped 87% between 2005 and 2019. Following a decline due to the COVID-19 pandemic, production reached almost 5 million bpd in 2022.  

Chart showing average Canadian oil output from 2010 up to 2024
Source: Canada Energy Regulator/RBN Energy

Energy Investing

On a seasonal basis, the energy sector tends to perform particularly well from late February to early May as the industry gears up for the North American driving season. It also tends to perform well from late July until late September, ahead of the winter.

There are different ways to invest in the energy sector to potentially benefit from the movement in the price of oil. Investors can buy individual stocks in oil companies or they can consider an oil-focused investment vehicle, such as an exchange traded fund (ETF).

ETF investing can offer potentially greater diversification than holding individual stocks, helping to reduce the risks associated with investing in just one or two companies.

Horizons ETFs offer solutions that can help investors gain exposure to the energy sector. With a strong home investment bias, Canadians have historically favoured investing in the nation’s oil and gas industry.

Representing a market capitalization of over $290 billion, the Canadian energy sector as measured by the S&P/TSX Energy Sector Index has returned close to 23% over the last three years.

Source: S&P Global as at February 15, 2024

An Income-Focused Approach to Canadian Energy

The Horizons Canadian Oil And Gas Equity Covered Call ETF (ENCC) offers a value proposition for investors looking to gain exposure to the dividends offered by companies in Canada’s oil & gas sector while potentially generating an enhanced yield with the added benefit of a covered call overlay. 

“From an equity investor standpoint, and looking at Energy as the underlying theme, it is important to acknowledge that our energy use is not going down; we are only using more energy and generating it in different ways,” says Naseem Husain, Senior Vice President and ETF Strategist at Horizons ETFs.

“In this environment, I like the covered call space for Energy because it allows the investor to participate in the upside (and downside) of energy stocks while generating attractive premiums from the call writing activity.”

ENCC has a 14.41% annual distribution yield as of February 22, 2024. Based on current yields, a $10,000 investment in ENCC would result in an additional $1,441 annually from the combination of the attractive dividend and options income yield.

ENCC’s standard performance data:

Source: Horizons ETFs as at January 31, 2024

The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF(s) or future returns on investment in the ETF(s).  Only the returns for periods of one year or greater are annualized returns.

“Overall, I view the energy sector as in a mature phase of slow growth which can lead to the optimal environment for covered call investing where investors participate in the gradual rise in stock prices, but the price increases are not sharp enough to trigger the call options written, potentially leaving investor with the additional income as the options expire and the market returns,” Husain says.

The Case for Midstream Exposure

Should the price of oil continue to trade in a narrow range, the fee-based business model of midstream oil companies could provide generous dividends and potentially cushion against rising oil volatility and adverse price movements.

Energy pipeline companies potentially strike the best balance between risk-adjusted returns and upside growth potential from rising energy prices and offer:

  • Potentially attractive dividend yields
  • Lower correlation to negative price movements in crude oil and natural gas
  • Historically lower volatility than the broader sector as service costs are fixed
  • Revenue stream expectations for security holders due to lower capital expenditures

The Horizons Pipelines & Energy Services Index ETF (HOG) invests in several Canadian oil and gas companies active in the nation’s midstream energy sector. HOG seeks to replicate the performance of the Solactive Pipelines & Energy Services Index.

HOG’s standard performance data:

Source: Horizons ETFs as at January 31, 2024

The indicated rates of return are the historical annual compounded total returns including changes in per unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return shown in the table are not intended to reflect future values of the ETF(s) or future returns on investment in the ETF(s).  Only the returns for periods of one year or greater are annualized returns.

DISCLAIMERS

Effective June 24, 2022, the investment objectives of the Horizons Canadian Oil and Gas Equity Covered Call ETF (“ENCC”) (formerly Horizons Enhanced Income Energy ETF (“HEE”)), were changed following receipt of the required unitholder and regulatory approvals, to seek to provide exposure to the performance of an index of Canadian companies that are involved in the crude oil and natural gas industry (currently, the Solactive Equal Weight Canada Oil & Gas Index) and to employ a dynamic covered call option writing program.  Previously, the ETF sought exposure to an underlying equal-weight equity portfolio and generally wrote covered call options on 100% of portfolio securities. The new ticker began trading on the TSX on June 27, 2022. For more information, please refer to the disclosure documents of the ETFs on www.HorizonsETFs.com.

Commissions, management fees and expenses all may be associated with an investment in exchange traded products (the “Horizons Exchange Traded Products”) managed by Horizons ETFs Management (Canada) Inc. The Horizons Exchange Traded Products are not guaranteed, their values change frequently and past performance may not be repeated. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

Certain statements may constitute a forward‐looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward‐looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward‐looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward‐looking statements. These forward‐looking statements are made as of the date hereof and the authors do not undertake to update any forward‐looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase exchange traded products (the “Horizons Exchange Traded Products”) managed by Horizons ETFs Management (Canada) Inc. and is not, and should not be construed as, investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor.

All comments, opinions and views expressed are generally based on information available as of the date of publication and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

Published February 26, 2024

Tags
Commodities Covered Call Energy Equity Oil Portfolio ETFs Stock Market

Get Horizons insights in your inbox

"*" indicates required fields

Please select whether you are an…*
* Indicates required field

Related Posts

At Horizons ETFs, we believe in education as empowerment. We endeavor to equip Canadian investors with the knowledge and tools they need to navigate the investing world. From the ETF basics to more complex topics like how our suite of inverse and leveraged funds work, our comprehensive learning library aims to be accessible for all investors, from beginners to experienced traders!