Norway Oil Strike Rattles ETFs

July 13, 2012

The recent oil strike in Norway briefly sent crude prices higher as investors anticipated reduced output. It was also instructive for ETF investors.

The impact of the strike, which briefly sent crude prices $1.54 a barrel higher on Monday, also illustrated how equity ETFs can move in response to important macroeconomic concerns. The strike luckily ended on Tuesday.

Two ETFs—the Global X FTSE Norway ETF (NYSEArca: NORW) and the iShares MSCI Norway Capped Investable Market Index Fund (BATS: ENOR)—offer exposure to Norwegian stocks.

The funds, though small and lacking heavy trading activity, offered a window into the market’s reaction to a possible decline in Norwegian energy output.

To understand the movement in NORW and ENOR, you have to keep in mind that in Norway, a reduction in oil output is a big deal.

The country’s economy relies heavily on energy exports, with as much as 65 percent of its exports being oil and gas. A severe reduction in output would undoubtedly be a bearish signal for the economy there.

The markets responded accordingly to the strike, knocking more than 3 percent off of iShares’ ENOR and over 2 percent off of Global X’s NORW, before the funds rebounded somewhat Tuesday.

5-Day Returns of Two Norwegian ETFs: ENOR and NORW

5-Day Returns of ENOR & NORW

Norway’s energy output does have an impact globally as well, particularly in natural gas. As the possible strike loomed, the United States Natural Gas Fund (NYSEArca: UNG) gained throughout the week.

More generally though, Norway is a reminder of what’s at stake for the global economy in the event of disruption in energy supply.

A Norway-related supply crisis was averted, but we saw last year how the price of oil spiked during the Arab Spring—especially when chaos descended on oil-rich Libya.

The takeaway is clear: Whenever disruptions occur—for whatever reason—price increases are sure to follow.

So what options do ETF investors have in such a case?

If you’re trying to ride oil prices up during a disruption in supply, there are plenty of futures-based plays. The PowerShares’ PowerShares DB Oil Fund (NYSEArca: DBO) offers exposure to WTI crude, the United States Brent Oil Fund (NYSEArca: BNO) offers exposure to Brent crude, and several other ETFs slice up the oil futures markets in slightly different ways.

UNG, as I mentioned above, will give you exposure to natural gas futures, if that’s what you’re targeting.

But what about equities? If oil prices spike, they may at least drag equity prices from oil-producing nations with them, providing something of a hedge.

Clearly, Norway has some exposure that can be targeted through ENOR and NORW.

Russia, the world’s second-largest oil-producing nation, has four equity ETFs dedicated to it from the likes of iShares and SSgA—several of which have more than 15 percent exposure to Russian energy giant Gazprom.

And finally, Van Eck has an ETF in registration that will track West Africa, including Nigeria, Africa’s most populous nation and a major oil exporter.

While Norway solved its labor problems for now, the standoff served as a reminder of the prominence of oil in the global economy.

And ETFs are clearly a viable tool to take measure of global markets, if not actually invest in them.

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