With oil slumping to start 2017, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, and other energy ETFs are sagging. That is disappointing after the energy sector surged last year, but some market observers believe the energy patch can be rejuvenated as 2017 moves along.
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.
Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term.
“In the past 13 weeks, the ETF gave up nearly all of the relative gains it had made against the Standard & Poor’s 500 index since January 2016. That’s some serious underperformance. Along with support breaks, we can add a 200-day average breakdown, which does have meaning in the stock market. The potential for more losses is very real,” reports Michael Kahn for Barron’s regarding XLE.
While OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.
Obviously, production is a key element in the decision-making process regarding energy investments. Currently, oil investors face conflicting reports regarding output. For example, Venezuela’s crude output is plunging to multi-year lows while Algeria is looking to boost production.
“The bottom line is that both oil and oil stocks are out of favor right now, but the charts do not offer enough evidence to say that will bring them down to new lows. It may take a while to play out, but it looks like the best strategy for investors is to wait for buying opportunities to emerge rather than purging portfolios of oil and oil stocks completely or selling them short,” according to Barron’s.
Traders looking to profit from falling oil prices have plenty of ETF options, including the ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO), which tries to reflect the two times inverse or -200% daily performance of WTI crude oil, and DB Crude Oil Double Short ETN (NYSEArca: DTO), which also follows a -200% performance of oil.
For more information on the energy sector, visit our energy category.