After surging in April, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) retreated a bit in May, but the benchmark exploration and production exchange traded fund is still up nearly 11% year-to-date.
Some market observers believe pullbacks in exploration and production equities represent buying opportunities as oil prices continue moving higher.
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.
“Roger Read, an integrated oil and gas analyst at Wells Fargo, raised his 2018 estimate for Brent to $64.81 per barrel from $60.22,” reports Crystal Kim for Barron’s. “Read wrote in a report that higher oil prices could curb demand growth through 2021, but supply will likely undershoot previous forecasts. He also reduced production expectations for OPEC through 2021 given the re-imposition of sanctions on Iran.”
Solid Fundamentals for Energy
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.
Related: Why Oil ETFs Can Bounce Back
RBC Capital Markets’ Lori Calvasina is among the analysts that are bullish on energy stocks, citing sound fundamentals.
“While energy stocks have certainly outperformed since then, Calvasina thinks that solid fundamentals, an improving environment for oil prices, positive macro tailwinds, and extremely strong earnings and revenue revisions, bode well for the sector,” according to Barron’s.
Some analysts speculate that smaller energy companies could poised for a period of out-performance over their large-cap counterparts. While the weighted average market value of XOP’s 69 holdings is $23.88 billion, as an equal-weight ETF, XOP does offer more small- and mid-cap exposure than cap-weighted rivals.
For more news on oil ETFs, visit our energy category.