Although the energy sector is not this year’s worst-performing group, energy equities and the relevant exchange traded funds are still areas of concern for advisors and investors. Oil majors have tightened their belts, reducing costs by laying off thousands of workers and halted many new projects.
Investors will also be keeping a close eye on dividends, especially with oil prices at $30 per barrel. Oil CEOs have pledged to maintain their dividends, but with oil prices dipping to 13-year lows, traders are growing skittish.
Those factors and others are prompting some market participants to mull further downside for the already vulnerable energy sector and the Energy Select Sector SPDR (NYSEArca: XLE).
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 implied volatility for XLE is more than 60 percent higher than it is for SPY, the ETF that tracks the S&P 500. Investor nervousness around crude oil seems even more extreme, with oil’s implied volatility at almost triple that of the SPY. Implied volatility is a measure that uses options prices to track the magnitude of expected moves (especially to the downside) for a given stock or ETF,” reports Stephanie Yang for CNBC.
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.
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.
“Royal Dutch Shell Plc had its debt rating cut to the lowest since Standard & Poor’s began coverage in 1990, and downgrades of several other major European oil and gas companies will probably follow in coming weeks,” reports Bloomberg.
Energy Select Sector SPDR
