The oil market may be stabilizing and consolidating around current levels as the markets seek to rebalance in the second half. Consequently, investors may find an opportunity in this cheap segment through downtrodden energy exploration and production-related exchange traded funds.
“Global oil demand has not yet risen to offset higher supply, but we expect sustained above-trend economic growth globally to support oil demand from here. Against this backdrop of delayed rebalancing, we now see oil prices fluctuating around current levels, in a lower range than we had expected earlier this year,” Richard Turnill, Global Chief Investment Strategist for BlackRock, said in a research note.
Energy prices gained after the Organization of Petroleum Exporting Countries reached an accord in November, fueling optimism that production cuts could help bring supply and demand into balance. However, higher-than-expected supply and diminish demand have weighed on the previously rosy outlook, which led to our current low prices of about $44 per barrel in West Texas Intermediate Crude futures.
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.
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.
Meanwhile, 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, but the growth rate of U.S. oil product has also recently slowed.
Consequently, with the worst may be behind us, and as we look to a rebalancing act in the oil market, investors may considering a return to the downtrodden energy sector.
“We see selected opportunities in beaten-down energy assets. We prefer shares of exploration and production (E&P) companies, particularly low-cost U.S. shale producers,” Turnill said. “These firms can benefit from technological advances and operate on a short investment cycle.”
ETF investors interested in the oil exploration and production space have a number of options available, including the iShares U.S. Oil & Gas Exploration & Production ETF (NYSEArca:IEO), SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca:XOP) and PowerShares Dynamic Energy Exploration & Production Portfolio (NYSEArca:PXE).
IEO follows a traditional market capitalization-weighted indexing methodology, which exposes investors to larger companies like ConcoPhillips, EOG Resources and Phillips. XOP tracks a more equal-weight indexing methodology where most components are weighted at around 2.0% of the overall portfolio. Lastly, PXE is considered a smart beta ETF offering that evaluates companies based on a variety of factors like price momentum, earnings momentum, quality, management action and value.
Furthemore, investors may also consider the VanEck Vectors Unconventional Oil & Gas ETF (NYSEArca:FRAK) as a direct play on North American fracking and oil sands companies.