The Energy Select Sector SPDR (NYSEArca: XLE) is off 11% over the past month though the largest equity-based energy exchange traded fund has rebounded off its recent lows following a jaw-dropping move to the upside by oil futures late last week.
For investors looking to participate in a potential oil rebound without trying to time the market via futures and futures-based exchange traded products, ETFs such as XLE remain solid ideas. In terms of XLE’s price action, it is worth noting the ETF, which debuted in mid-1998, has been down similar roads in the past. For example, Schaeffer’s Investment Research notes that when XLE peaked around $90 in 2008, the ETF proceeded to lose half those gains, falling to $45 in just a few months. That scenario replayed with XLE’s most recent peak. XLE’s 2014 peak around $100 has been followed by a quick 50% retracement, last seen at $50.78, according to Schaeffer’s.
The low oil environment may persist as the Organization of Petroleum Exporting Countries projects demand for its crude to remain lower in 2020 than in 2016 as rivals remain resilient despite the depressed prices.
“There is good news though. At this point, energy stocks as a whole are deeply discounted. The entire sector is deep in value territory. While that does not mean that the sector is going to turn around tomorrow, it does mean that energy stocks bought today will likely be higher in five years’ time, perhaps much higher,” reports OilPrice.com.
Last month “Chevron announced earlier this month it would cut capital spending by 24 percent in 2016 to $26.6 billion. The company will not issue production forecasts until it reports earnings in January, but management previously said it expects output growth of 13 to 15 percent — about 2.9 million to 3 million barrels per day — by the end of 2017,” according to CNBC.
Analysts expect that trend to continue in 2016. Bright spots have been few and far between for equity-based energy exchange traded funds this year and for all the struggles the encountered by the sector, it still is not inexpensive relative to the S&P 500. In fact, the energy patch is downright pricey compared to the broader market. This after a spate of spending cuts that have not been met with widespread enthusiasm among investors. [Oil ETF Dividends Appear Safe…Sort Of]
“The problem that many energy investors today face is that it is not clear which energy stocks are well positioned, and which are not. While the sector as a whole may represent a good value, some companies will likely end up going bankrupt or being sold in a distressed sale before the market turns around. Investors betting on individual stocks in this market run the risk of picking a name that could go bankrupt before the market turns,” adds OilPrice.com
Energy Select Sector SPDR
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.