Energy sector-related ETFs were among the worst off Thursday after the Energy Information Administration revealed a jump in U.S. crude-oil stockpiles and Saudi Arabia said it would pick up the slack with the Iran export waivers expiring.
On Thursday, energy oil and gas exploration and production sectors were falling behind, with the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) down 3.2%. The broader Energy Select Sector SPDR (NYSEArca: XLE) retreated 1.7%.
Meanwhile, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, slipped 3.0% and was testing its long-term support at the 200-day simple moving average as WTI crude oil futures were 3.1% lower to $61.6 per barrel.
The energy segment pulled back after the EIA revealed U.S. oil inventories climbed by 9.9 million barrels last week, compared to expectations for a 900,000 barrel increase, the Wall Street Journal reports. Domestic inventories are now at 471 million barrels, the most since September 2017. Additionally, the updated data revealed U.S. production surged to a record 12.3 million barrels per day last week.
“Oil prices are under pressure, reflecting concerns about growing U.S. inventories,” Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, told the WSJ. “Growing U.S. oil production and the weaker trend to global growth has helped moderate the impact of OPEC production cuts and U.S. sanctions on Iran and Venezuela.”
Michael Hewson, chief market analyst at brokerage CMC Markets, also underscored the second week in a row of inventory builds that were much larger than expected, warning that “if these inventories are rising, it suggests demand is falling.”
Further fueling the retreat in the energy markets, the U.S. is set to end its Iran sanction waivers program that allowed eight countries, including China and India, to import Iranian oil temporarily. However, Saudi Arabia stated it would increase its share of exports to make up the difference.
Cyclical Sector in Jeopardy?
Will a fall in oil profits mean cyclical sectors will fall out of favor and more capital will flow into defensive sectors as 2019 wears on?
For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.
Conversely, if investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.
For more information on the energy sector, visit our energy category.