The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, slumped about 8% last week, but some market participants believe the sector’s recent struggles could present astute investors with a buying opportunity.
Market observers and analysts argue that U.S. energy stocks are in a position to outperform broader equity markets this year, even if oil prices don’t move higher. The energy industry has grown more efficient after cutting costs in response to the plunge in crude oil prices in previous years, so they are now in a better position to improve revenue at lower oil prices.
Exxon Mobil (NYSE:XOM), usually the largest component in cap-weighted ETFs like XLE, “is aiming to turn things around by ramping up production in U.S. shale, while also prioritizing the development of several large discoveries off the coast of Guyana,” reports OilPrice.com. “Meanwhile, ExxonMobil recently announced plans to spend $50 billion on U.S. shale over the next five years. By 2025, the oil major says it will quadruple its shale production to around 800,000 bpd, three quarters of which will come from the Permian.”
Market observers believe the sector can continue its recent rebound. Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. 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.
Investors shouldn’t forget about the demand side either, especially with a growing global economy. Citigroup projects a greater likelihood of persistent shortage of oil than a big jump in supply over the coming quarters.
“Moreover, there is a group of large oil companies that are now in a place where they can cut costs and rake in cash, having completed a series of large-scale projects in recent years,” according to OilPrice. com. “Royal Dutch Shell, BP and Total all grew heavily in recent years, and are now looking to cash in on those investments. For them, things are on the upswing.”
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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.