As oil prices continue to rise, energy sector exchange traded funds are rebounding. However, investors should remain cautious on any overzealous behavior if the industry opens up the oil floodgates too quickly.
Since the March lows, the United States Oil Fund (NYSEArca: USO) has surged 28.3%. West Texas Intermediate oil futures are now hovering around $59.4 per barrel.
Meanwhile, the Market Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK), which includes North American hydraulic fracturing companies, has increased 15.6% since the March low while the broader Energy Select Sector SPDR (NYSEArca: XLE) gained 10.8%.
Restarting their operations, shale explorers like EOG Resources (NYSE: EOG) and Pioneer Natural Resources (NYSE: PXD) are preparing to bounce back from the most severe slowdown in U.S. oil drilling on record, reports Lynn Doan for Bloomberg.
FRAK includes a 6.9% tilt toward EOG and 3.8% in PXD.
However, with more drillers coming back online, some observers are worried that the market could experience a double dip.
“You’re inviting a lot of pent-up supply to come back into the market – not only do you have people drilling again, but you have this fracklog of over 4,000 uncompleted wells,” Harry Tchilinguirian, the head of commodity markets strategy at BNP Paribas SA, said in the article. “And then we’re in a situation where the market could easily go back into the mid- $50’s.”
The so-called fracklog, or number of wells waiting to be hydraulically fractured, has tripled over the past year after companies shutdown operations in light of the low oil prices. However, with oil prices rebounding, the fracklog may slow a recovery as more companies finish wells and restart their pumps. [Shale ‘Fracklog’ Could Cap Gains in Energy Sector, ETFs]
James Williams, president of energy consultant WTRG Economics, believes that the drilling slowdown won’t hit a bottom for another month. Consequently, the energy market could experience a period uncertainty.
“This is an indicator that we’re nearing the end of the bust,” Williams said. “What we’re going to see now are mixed signals from the different basins as we near the bottom of the cycle.”
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Max Chen contributed to this article.