2021 has been a good year for oil and gas generally. Oil is up by over 50% this year, as is natural gas. The share prices of natural resource exploration companies are largely reliant on the value of these commodities, so it’s no surprise that they’ve had a stellar year.
In fact, at the time of writing, iShares Oil & Gas Exploration & Production UCITS ETF (LSE:SPOG) is the best-performing ETF of the year.
The ETF
I’ve always been a fan of ETFs (exchange traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost.
This particular ETF aims to track the S&P Commodity Producers Oil & Gas Exploration & Production Index.
This index measures the performance of some of the largest publicly traded firms involved in oil and gas extraction and development from around the world. The companies must also meet liquidity and market capitalisation requirements to be included.
Quite simply, this fund has had a phenomenal year. Year to date the fund has increased by over 70% and over 12 months the performance is similar.
Looking into some of the holdings reveals some heavyweight natural resources companies. The two biggest holdings are ConocoPhillips and EOG Resources. The former is Alaska’s largest crude oil exploration and production company. The latter is a Fortune 500 company headquartered in Texas. Both firms are in the oil discovery and processing business with operations in the US, Middle East, Europe, and Asia.
Canadian Natural Resources, is the third-largest holding in the fund. It’s one of the biggest independent crude oil and natural gas producers in the world.
Should I invest?
The increase in the share price of this fund is ultimately because of the rise in the value of oil and gas. As the world has come out of lockdowns, soaring demand combined with surging business activity has rapidly increased energy prices.
However, the 2022 price outlook for these commodities is far from certain. On one hand, the International Energy Agency projects oil demand to recover to pre-pandemic levels in 2022. However, according to an S&P report, the price of oil should stabilise in 2022. On balance, I think that the price of oil and gas in 2022 will be largely determined by Covid variants and possible lockdown restrictions. A surge in the new Omicron variant, identified by the World Health Organisation as potentially very high-risk, has already seen the price of oil fall.
For this reason, despite this being the best-performing ETF of the year so far, I’m happy to wait and see what happens to energy prices in 2022 before adding it to my own portfolio.
