Gas prices hit an all-time high in December 2021 and oil recently hit $90 a barrel, which is the highest level since 2014. Given both supply-side and demand-side factors, I believe that prices could rise further this year. If so, this exchange traded fund (ETF) might be a no-brainer buy for me in 2022. I’m looking at iShares S&P Commodity Producers Oil & Gas UCITS ETF (LSE: SPOG).
Backdrop
First, on the supply side, I see constraints. There are continuing Russia-Ukraine tensions and the fallout that could ensue from any escalation could be major. Russia is a huge oil exporter. If there’s any hindrance to supply, the global price of oil will rise. In terms of gas, Russia is also a major supplier of gas to central Europe and vast quantities are carried through Ukraine. Any kind of supply problem may now have a global rather than just a European impact. This is because the US is now talking about helping Europe with any shortages by exporting tankers of its own gas reserves.
Second, I expect increasing demand this year. I think world economies will move towards opening fully as we put the Omicron variant of Covid behind us. Hopefully, as we get back to normal, travel and tourism numbers will improve, commuting will increase and generally the demand for oil will rise.
The ETF
The ETF I’m looking at aims to track the S&P Commodity Producers Oil & Gas Exploration & Production Index. I think this fund offers me the best opportunity to take advantage of rising commodity prices.
This index measures the performance of some of the largest publicly traded firms involved in oil and gas extraction and development around the world. The companies must also meet liquidity and market capitalisation requirements to be included.
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 involved in oil discovery and processing.
One risk to be aware of for this ETF is that in 2021 we saw a push by governments around the world towards clean energy. It’s possible investors might continue to turn away from traditional energy companies and direct money towards the renewables sector. This would likely be negative for the fund.
Outlook
But overall, I’m optimistic. The profits of the companies in this ETF rely heavily on the price of oil and gas. As prices rose in 2021, the fund’s price increased by over 70% and year-to-date it’s already up 10%.
Though nothing is certain, I think the prices of natural resources will rise again this year. In fact, I think oil could hit $100 a barrel. Looking back at 2014 when oil prices were last at this level, the fund was trading at over 1,900p. If we get there again, this would mean an increase of over 30% from where we are today.
For that reason, I think that for my own portfolio, iShares S&P Commodity Producers Oil & Gas UCITS ETF could be a no-brainer buy for 2022.