With oil ranking as one of this year’s worst-performing commodities, it is not surprising that the energy sector is the worst-performing group in the S&P 500.
For example, the Energy Select Sector SPDR (NYSEArca:XLE), the largest exchange traded fund dedicated to energy equities, is down about 15% year-to-date and is closing in on a dubious losing streak.
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.
“As oil has dropped, the energy sector’s full-year profit expectations have declined as well. The 2017 annual earnings-per-share expectation has declined from about 340 percent at the beginning of the year to about 305 percent year-over-year growth, S&P Global portfolio manager Erin Gibbs pointed out,” reports CNBC.
Energy is the S&P 500’s seventh-largest sector allocation, a spot the group has occupied for some time. However, at 6%, energy is more than 50% the 9.2% allocated to consumer staples. Three sectors – healthcare, financial services and consumer discretionary – have more than double the weights in the S&P 500 than energy does while technology’s weight in the index is more than triple that of energy’s.
Related: Oil ETFs: Worse, Not Better, as OPEC Cuts Back
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.
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.
“Next year’s expected earnings-per-share growth for the sector has held steady at around 44 percent, Gibbs pointed out, but she added that wouldn’t anticipate a real turnaround in energy names until oil stabilizes,” according to CNBC. “WTI crude prices have plummeted as the market continues to contend with a supply glut that remains in place despite OPEC-led production cuts agreed upon at the end of last year.”
For more information on the oil market, visit our oil category.