Energy markets have fallen off hard, with crude oil down nearly 3% Thursday on global uncertainty due to U.S. trade tensions with China, as well as U.S. sanctions against Iran.
Energy-focused ETFs generally followed crude oil’s collapse, with most ending the day flat and the popular Energy Select Sector SPDR Fund (XLE) losing 1.27% as of 3pm ET Thursday.
“It’s going to require somewhat of a steel stomach to step back into this marketplace,” said Matthew Bartolini, managing director and head of SPDR Americas Research at State Street Global Advisors.
“I think the whole entire energy sector has been facing some weak price momentum, but also earnings momentum,” he said Wednesday on CNBC’s “ETF Edge.” “Not a lot of firms were beating expectations.”
Iranian May crude exports fell to less than half of April levels at around 400,000 barrels per day (bpd) after the United States toughened sanctions on Tehran’s main source of income. Iran needs to export at least 1.5-2.0 million bpd of crude to balance its books.
“We see an abundance of escalation risks in large part because the U.S. sanctions are subjecting Iran to almost unprecedented economic pain,” said Helima Croft, managing director of RBC Capital Markets.
To compensate for the fall in oil, Bartolini advised those unswerving investors to look for value in drilling companies rather than oil-service companies, which tend to have major revenue vulnerabilities based on overseas market exposure.
”[Drilling companies are] going to have a higher sensitivity to the spot price of oil. And given that it’s fallen so much over the last few weeks and we have a potential impact of weakening demand, some[thing]like XOP would have sort of a negative skew to it,” he said. “But, again, if we get a reprieve from these trade tensions, that higher sensitivity could be a benefit to those investors willing to take on that higher volatility.”
CFRA’s Todd Rosenbluth had a few suggestions of what investors might do as well to mitigate oil moves.
“We think a good way of playing this is through the [master-limited partnership], the transportation side of the space,” Rosenbluth, the firm’s senior director of ETF and mutual fund research, said in the same “ETF Edge” interview. “So, MLPX is a Global X ETF that offers stability of the income stream that’s there. These companies are impacted more from volumes than oil prices. So that may be a safer way of playing the energy sector, according to CFRA.:
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