While it is not setting the market on fire by any stretch, the Energy Select Sector SPDR (NYSEArca: XLE) is acting somewhat better to start 2016 than it did in the previous two years when it was the worst-performing sector SPDR exchange traded fund.
Still, 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]
And with good news for the energy sector still hard to come by, many analysts and market observers are cautious on the sector’s near-term outlook.
Brad Handler, managing director of equity research at Jefferies, told CNBC that he “thinks that oil companies are currently reacting to credit constraints and agency rating pressures, and are struggling to manage dividends and balance sheets. While those factors are still in play, investors should stay away from the sector.”
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.
In the ETF space, traders have been increasing bullish bets on a potential rebound in energy prices. For instance, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has attracted $875.9 million in net inflows so far this year, according to ETF.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.