The Energy Select Sector SPDR (NYSEArca: XLE) is down more than 22% year-to-date and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) is down more than 32%. Those performances explain why short sellers have so eagerly attacked the energy sector this year, but now some big banks are defending the downtrodden energy sector.

There are reasons for investors to be cautious with volatile energy ETFs. 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. With the U.S. dollar strengthening and the Federal Reserve looking at tightening its monetary policy, the various U.S. market sectors and related exchange traded funds could behave differently in a strong USD environment.

“The world’s oil companies have canceled or delayed final investment decisions on ~150 projects that could wipe out 19M bbl/day from the world’s hydrocarbons and stay underground for several years longer than expected amid lower crude oil prices, according to a new report from Tudor Pickering Holt,” reports Seeking Alpha.

On the back of some recent strength in the sector, strength in the energy sector, integrated oil companies have adjusted to the low oil environment by reducing costs, divesting businesses and squeezing suppliers for better deals.

“JPMorgan Chase & Co. boosted its rating on U.S. energy companies to a buy in a report yesterday while Barclays Plc upgraded global oil producers. For Dubravko Lakos-Bujas, the head of U.S. equity strategy at JPMorgan, a combination of improving economic growth, a contracting crude supply from non-OPEC producers and excessive short selling are likely to mark a turning point,” reports Inyoung Hwang for Bloomberg.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.