Opportunity in Energy ETFs Patch As Oil Trade Declines

The struggles of the energy sector this year have been well-documented. For example, the iShares U.S. Energy ETF (NYSEArca: IYE) is lower by 8%, but some market observers believe the sector’s recent stumble could give way to a buying opportunity.

Energy is one of a small amount of sectors that still trades at a noticeable discount relative to long-term averages. Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.

“Oil prices are hard to predict, as production cuts hinge on an uncertain political environment,” said BlackRock in a recent note. “We see oil trading mostly sideways over the next three months. OPEC members have shown discipline in cutting oil production, and U.S. inventory growth should soon stabilize as oil refiners increase purchases. Global demand is also likely to rise amid reflation.”

The challenge for energy equities is that some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices.