The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) is higher by more than 12% this month. With earnings season starting for the energy sector, some analysts believe exploration and production stocks, such as those residing in XOP, could see more upside.

XOP “seeks to provide exposure the oil and gas exploration and production segment of the S&P TMI, which comprises the following sub-industries: Integrated Oil & Gas, Oil & Gas Exploration & Production, and Oil & Gas Refining & Marketing,” according to State Street SPDR.

Advances in U.S. shale oil production technologies are contributing the to supply surplus and weighing on any oil price gains. It has become much cheaper for the upstart U.S. shale producers to extract oil out of the ground, sparking U.S. oil output to its highest levels since the 1970s.

Stifel analyst Derrick Whitfield writes, “investors will be focused on activity levels, inflationary pressures, and project execution in the upcoming quarterly reports. More importantly for the shares, however, he writes that 2018 will finally be the year that E&P companies start to see some of the benefit of higher commodity prices,” reports Teresa Rivas for Barron’s.

Can Oil Prices Continue to Climb?

It took equity-based energy ETFs a while to join in on oil’s upside, but now that that is happening, these funds could be potent if oil prices continue climbing.

While the global oil supply glut has not diminished as quickly as previously anticipated, global oil inventories are still slowly falling and we may see a rebalancing of supply and demand in the second half of the year.

Yet Whitfield expects the trend to continue, assuming the companies continue to demonstrate capital discipline and oil prices remain cooperative, given that XOP has still meaningfully underperformed oil prices and the S&P 500 in the past four and five years, respectively, the sector is ‘broadly under-owned and trades at competitive multiples relative to other sectors,’” according to Barron’s.

For more news on oil ETFs, visit our energy category.

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.

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