Oil futures are rebounding and some analysts believe the way to play the commodity’s recent resurgence is with the energy sector, including stocks and ETFs.
The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based ETF, gained more than 9% in September, but the energy sector remains the worst-performing group in the S&P 500 this year.
Rivals to XLE include the Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY).
“The headwinds for the equities have now largely played out: energy has been the worst performing sector in MSCI World, with relative performance of energy equities in the US & Europe lagging their normal relationship with the oil price,” according to a Goldman Sachs note cited by TheStreet.com.
Investors should be aware that XLE and its aforementioned rivals allocated hefty portions of their lineups to the largest oil companies, including Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) along with Schlumberger (NYSE: SLB), the largest oilfield services provider. In some cases Exxon Mobil and Chevron, the two largest U.S. oil companies, combine for up to a third of these ETFs’ weights.
Related: Big Energy ETFs Continue Their Comebacks
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.
“Yet structural improvements mean that their free cash flow position has significantly improved. Likely enabling European producers to abandon dilutive scrip dividends and return to cash, while capital expenditure cuts could also provide a boost, with Goldman tipping Capex budgets to undershoot guidance in 2018 by 10% to 20%,” reports TheStreet.com.
Citigroup also 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, said that a handful of Organization of Petroleum Exporting Countries 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.
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