Oil Sell-Off A Buying Opportunity In Energy ETFs

July 28, 2016

After a strong five-month rally that saw prices nearly double off their lows, oil hit a bit of a road bump in July.

Analysts point to a glut of crude oil and gasoline in storage tanks in the United States and elsewhere as the cause of the decline. As of last week, crude stockpiles in the U.S. were 62 million barrels, or 13.3% above the year-ago level, while gasoline stockpiles were 26 million barrels, or 11.8% above the year-ago level, according to the Energy Information Administration.

WTI crude oil prices sagged to less than $42/barrel on Wednesday, down 19% from highs of more than $51 in June.

To be sure, the magnitude of the current slide isn't anywhere close to what transpired in January and February, when oil dipped to $26/barrel, fueling a broad sell-off in stocks and high-yield bond markets.

This time around, the SPDR S&P 500 ETF (SPY | A-97) and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68) have barely flinched. SPY is essentially at record highs, while HYG is close to a nine-month high.

YTD Price Charts For Oil Futures, SPY, HYG

Should investors be more concerned about the renewed decline in oil prices than they currently are?

Fundamentals Stronger

A look at the fundamentals of the oil market suggests that investors may be right to not panic. The outlook for oil today is significantly different than the outlook at the start of the year.

For one, U.S. oil production is substantially lower than where it was on Dec. 31―700,000 barrels per day, or 8% lower (from its highs of last year, output is down a whopping 1.1 million barrels per day). The recent decline in oil prices will only serve to discourage production even more, keeping pressure on a key source of supply.

 

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