Market Observers See Upside for E&P ETFs

The energy sector is the second-best performer in the S&P 500 this year behind the utilities sector with exploration and production stocks and exchange traded funds driving the energy patch in a big way. The popular and volatile SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP), the largest ETF focusing on exploration and production companies, has been a stellar performer this year, but some market observers see more gains coming for XOP and rival ETFs.

Making the sector’s rebound this year all the more impressive is that it comes against the backdrop of still low oil prices, little help in the way of significant production cuts and massive spending reductions by global oil majors.

Related: Why Investors are Bearish on Oil ETFs

Plenty of skeptics remain regarding oil’s fundamental outlook. There might be something to that skepticism as many of the world’s major ex-U.S. producers of oil have not displayed a willingness to pare production. Even the output reductions in the U.S. have been modest. The good news is U.S. shale output is slightly declining, but challenges remain on the output front from OPEC producers.

“E&Ps are 40% off lows, up 17% YTD yet 50% below their 2014 highs, in a broader market that is up 7% since mid-2014. Despite recent strength, we believe there remains significant relative upside in a sector recovery over the next several years that, for E&Ps, will have a North American focus,” according to part of a Morgan Stanley note posted by Ben Levisohn of Barron’s.


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.