After spending considerable time as this year’s worst-performing sector, the energy patch is looking to end 2017 on firmer footing. For example, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is up about 3% over the past week as oil prices are cobbling together one of this year’s best rallies.
The Permian Basin will be a key factor in the growth of U.S. oil production. Of the 940 oil rigs in operation, about 377 are in the Permian Basin. Many oil producers have also decided to drill but not complete wells in the region due to minor transportation constraints, which leaves a lot of untapped potential on the ground.
Investors considering the energy sector should take their cues from the group’s biggest names, including Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A).
“It’s no secret that Shell has ambitions to overtake Exxon as the world’s number-one oil company in terms of value,” reports OilPrice.com. “It’s actually on track to beat Exxon on cash flow from operations for full 2017. The Anglo-Dutch company is also considering a share buyback at some point in the future as financial performance improves and the company gains confidence that it can cover dividend payouts with cash on hand.”
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.