Goldman Sachs was out with some interesting oil commentary Thursday, saying oil at $35 a barrel is an ideal price area and makes some U.S.-based exploration and production companies compelling buys. That includes some of the stocks found in exchange traded funds, such as the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP).
Confirming its volatility and sensitivity to oil prices, XOP is down 42% over the past year, but the ETF is higher by more than 5% over the past month. 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.
Investors remain apprehensive concerning the veracity of oil’s recent rally, a fact confirmed by the recent pullback in futures-based oil exchange traded products. Output remains another source of concern for energy investors and the issue is twofold.
First, there has been little in the way of significant output reductions from the world’s major oil-producing nations. Second, even if dramatic output reductions arrive, some energy market observers see the impact as being negligible for energy equities and ETFs.
“While prices of crude at that level are above cash costs of production, they will deter a rebound in shale output from occurring too early, the bank’s New York-based analysts including Brian Singer said in a report dated April 6. Oil at $30 to $35 a barrel should keep the behavior of U.S. companies unchanged and help lift West Texas Intermediate to $55 to $60 a barrel in 2017, according to Goldman,” reports Sharon Cho for Bloomberg.