The energy sector is still the worst-performing sector in the S&P 500 this year and the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is still lower by almost 9% year-to-date, but there are signs of momentum for energy stocks.
Declining prices in recent years have prompted scores of major oil producers to rein in capital spending. Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.
“Exxon Mobil Corp. and Royal Dutch Shell Plc, the two most valuable producers, are competing for top honors on who can churn out the most profit and cash. Quarterly results from Chevron Corp., Total SA and BP Plc proved the companies can not only survive with oil at $50 a barrel — they can flourish,” reports Bloomberg.
Dow components Exxon and Chevron, the two largest U.S. oil companies, combine for about 40% of cap-weighted energy ETFs, such as XLE, the Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY).
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.