Investors have heard this, perhaps too much, this year: Energy is the worst-performing sector in the S&P 500 and has that unfortunate status by a wide margin. The Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, is down 15.7% year-to-date.
Investors considering ETFs such as XLE and rival ETFs such as the Fidelity MSCI Energy Index ETF (NYSEArca: FENY) and the Vanguard Energy ETF (NYSEArca: VDE) need to again monitor oil production data and credit issues at smaller energy producers.
Obviously, production is a key element in the decision-making process regarding energy investments. Currently, oil investors face conflicting reports regarding output. For example, Venezuela’s crude output is plunging to multi-year lows while Algeria is looking to boost production.
“Indeed, since the sector is more than 20 percent below the 52-week high hit last December, it has fallen into a condition some refer to as a ‘technical bear market,’” reports CNBC. “Much of the sector’s weakness has been driven by rising shale oil production, increasing crude inventory and investors’ doubts about production cut cooperation by OPEC members.”
While OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.
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.
Mark Tepper, president of Strategic Wealth Partners, said in an interview with CNBC “that he just went overweight on energy names, even as the sector has fallen 17 percent on a year-to-date basis and the price of oil has tumbled 10 percent in that time,” while adding “his valuations measurement model is currently one standard deviation below its average level. Not only does that indicate energy stocks may now be inexpensive, but that specific level is typically seen before a bullish reversal.”
For more information on the oil market, visit our oil category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.