The energy sector just cannot seem to cobble together any momentum. After rising last month, the Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, has given back all of those gains over the past week, bringing its year-to-date loss to 16.5%.
While many oil market observers focus on the Organization of Petroleum Exporting Countries (OPEC) as a major market force, U.S. shale prices continue to be a potential hurdle for oil as it tries to add to 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.
“Options market activity indicates that traders are looking to buy oil around $40 per barrel and sell it at $50,” said Stacey Gilbert, head of derivatives strategy at Susquehanna. “This activity has been in place for much of this year, Gilbert said, and will continue to be a theme going forward,” reports CNBC.
That underscores the sort of tug-of-war scenario confounding oil this year, one that makes it difficult for ETFs like XLE to mount credible rallies if traders depart oil when it flirts with $50 per barrel.
“Some individual energy names still have decent dividend yields, Gilbert said, and have changed their behavior based on this year’s fluctuation in oil prices. Bullish call options on the XLE could be attractive at this point, Gilbert said, given the opportunity for sentiment to shift,” according to CNBC.
Related: Oil ETFs Look for Supply Catalysts
While U.S. shale producers previously continued pumping in the face of low prices, the industry has recently revealed a spate of capital spending reductions, indicating still low crude prices are taking a toll. Low oil prices are also prompting speculation about credit downgrades for some exploration and production firms that already carry junk credit ratings.
Traders who are wary of further weakness in the energy segment may turn to inverse ETF options to hedge against declines. For instance, the Direxion Daily Energy Bear 1x Shares (NYSEArca: ERYY) takes the -1x or -100% daily inverse performance of the Energy Select Sector Index. The ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse or -100% daily performance of the Dow Jones U.S. Oil & Gas Index.
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