The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is still down 7.5% year-to-date, making it the worst performer among the sector SPDR ETFs.
However, XLE is up almost 4.5% in the fourth quarter and some analysts are expecting 2018 will bring a rebound for major oil stocks.
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.
Ed Morse, global head of commodities at the bank, argued that a handful of OPEC members might already be pumping at maximum capacity already, and due to weak investment in exploration and development, there is a greater risk of a market squeeze once demand picks up, especially from a growing Chinese economy.
Related: The Bitcoin ETF Race is Quickly Intensifying
“In 2018, companies from Royal Dutch Shell Plc to Exxon Mobil Corp. will find themselves with a surplus of cash to fund dividends, ruling the world of deep water mega-projects and even coming out ahead in tax negotiations with oil-reliant governments around the globe, according to Michele Della Vigna, Goldman’s head of energy-industry research,” reports Bloomberg.
While the Organization of Petroleum Exporting Countries have moved to cut production, expectations of continued U.S. shale production remain a deterring factor. Nevertheless, recent U.S. inventory drawdowns, which if sustained, could support the current price levels.
“The industry’s success in cutting costs, paired with a low oil price that keeps smaller competitors out of the biggest projects, has created an environment where only major players can compete, Vigna said,” according to Bloomberg. “That should bolster earnings and return the industry giants to a position of dominance not seen in 20 years.”
Declining prices in recent years have prompted scores of major oil producers to rein in capital spending. Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.
Dow components Exxon and Chevron, the two largest U.S. oil companies, combine for about 40% of cap-weighted energy ETFs, such as XLE, the Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY).
For more information on the oil market, visit our oil category.