Equity-based energy ETFs are delivering some solid performances this year. Standouts in that group include funds tracking exploration and production stocks, such as the iShares U.S. Oil & Gas Exploration & Production ETF (Cboe: IEO).
IEO follows a traditional market capitalization-weighted indexing methodology, which exposes investors to larger companies like ConcoPhillips, EOG Resources and Phillips.
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.
On a technical basis, IEO currently looks compelling.
“The ETF is forming a flat, base-on-base pattern. The potential buy point is 77.94, but ETF investors can consider the past week’s move back above the 50-day moving average as an entry. ETFs tend to move slower than individual stocks, so earlier entries such as this can be advantageous,” reports Investor’s Business Daily (IBD).
OPEC, Oil Prices & Russia
Since 2016, OPEC and a number of other major oil prices like Russia have been in a concerted effort to cut 2% of the global crude supply in an attempt to diminish the global supply glut and stabilize crude prices. Analysts now project the oil market could move into a deficit in the second part of 2018 and 2019 of 0.5 million barrels and later 0.3 million barrels per day as demand begins to outpace supply.
“But most energy ETFs are closely linked to the price of oil, which is a risk factor endemic to these types of funds. For the past 12 months, there’s been a significant correlation between the price of crude and iShares U.S. Oil & Gas Exploration & Production,” according to IBD.
Related: Oil ETFs Could be Rangebound for a While
The U.S. energy industry could face higher cost of capital to finance the ongoing boom or experience slower growth ahead.
Around two-thirds of U.S. oil producers failed to balance costs in the second quarter, despite crude oil prices rising above $70 per barrel, the Wall Street reports. 50 major U.S. oil companies revealed second-quarter results showing they spent $2 billion more than they brought in.
“While investors can play the short- and medium-term moves in the sector, remember that oil has been in a bull market for more than a year. Patient investors can use the iShares ETF for long-term investments, if they can tolerate the sometimes sharp pullbacks,” reports IBD.
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