With oil market watchers anticipating low energy prices are here to stay, the depressed crude oil prices could fall below break-even levels for the shale industry, further pressuring sector-related exchange traded funds.
The energy sectors that cover the U.S. oil boom have been among worst performing areas of the market this year. For instance, year-to-date, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) declined 17.8% and iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) decreased 15.3%.
Meanwhile, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has plunged 31.8% year-to-date. WTI crude oil futures are now trading around $42.4 per barrel.
Now, oil experts project crude prices will continue to dip to levels where many shale producers will be unable to generate a profit, reports Patti Domm for CNBC.
According to a recent CNBC oil survey, the majority of investors and analysts believe WTI will slide to between $30 and $40 per barrel this fall, with about 62% of respondents anticipating the WTI crude to trade between the range and stay low toward the end of the year,
Additionally, 43% of respondents believe the breakeven price for the U.S. shale industry is about $45 to $55 per barrel, and 24% estimate the breakeven level at $55 to $65.
Consequently, the Market Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK), which includes North American hydraulic fracturing companies, has been among the hardest hit oil-related ETFs, pressured by the cheap oil environment. FRAK decreased 22.0% year-to-date.
“This is a pretty tough market, and lower prices are going to rebalance it,” IHS Vice Chairman Daniel Yergin told CNBC. “We see a tough couple of quarters for producers…next spring demand is going to go down again.”
Moreover, if oil prices falls to new lows and the shale industry is unable to turn a profit, the highly leveraged industry may find it harder to repay debt obligations. The rising default concerns may have also contributed to the pullback in the speculative-grade, junk bond market. For instance, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), which includes a 13.1% tilt toward the energy sector, fell 3.8% over the past three months and the PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB), which holds a 14.7% energy sector weight, dipped 2.8% over the past three months. [Falling Oil Prices Renew Junk Bond ETF Default Fears]
For more information on the oil industry, visit our energy category.
Max Chen contributed to this article.