The energy sector is already this year’s worst-performing group and oil is already one of this year’s worst-performing commodities, but more downside could be seen for some energy exchange traded funds in September.
While the Organization of Petroleum Exporting Countries have moved to cut production, expectations of continued U.S. shale production remain a deterring factor. Nevertheless, recent U.S. inventory drawdowns, which if sustained, could support the current price levels.
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.
Related: Gasoline ETF Jumps as Harvey Hits Refineries
The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) and the PowerShares DB Oil ETF (NYSEARCA: DBO) are down 27% and 16%, respectively, year-to-date, but those historically struggle in September. For its part XOP, has bee struggling in the wake Tropical Storm Harvey.
“Exploration-and-production stocks — many of which are among XOP’s top holdings — have been some of the worst performers since Harvey. The shares of XOP were last seen 0.2% lower at $29.53, set for a second straight down day, and earlier fell as low as $29 — within striking distance of their Aug. 21 annual low of $28.69. Since touching an annual high of $44.97 in mid-December, it’s been a channel of lower highs and lows for XOP, led into the red beneath its 10-week moving average,” according to Schaeffer’s Investment Research.
Data suggest September is usually unkind to XOP and DBO.
“Looking ahead, things could get even rougher for XOP, if history repeats. Since inception, the ETF has lost an average of 2.6% in the month of September, according to Schaeffer’s Quantitative Analyst Chris Prybal, marking its worst month of the calendar year,” according to Schaeffer’s. “DBO has averaged a September loss of 2.2% since inception, though its worst months are typically January (down 3.4%, on average) and July (down 2.9%, on average). What’s more, DBO has been one of the worst ETFs to own in the second half of the year, and has averaged a loss in every single month from July to December.”
For more news on oil ETFs, visit our oil category.