Energy ETFs Lag As Rising Oil Tops $60

November 01, 2017

Oversupply Fears

USO isn't the only oil-linked ETF to underperform. The Energy Select Sector SPDR Fund (XLE) is down 7.4% so far in 2017, making it one of the worst sector ETFs of the year.

There's been a reluctance on the part of analysts and investors to believe that higher oil prices are here to stay, which has capped shares of energy stocks.

“The market is frightened by the shale oil band,” Olivier Jakob of PetroMatrix told the Financial Times. “But it’s not just traders—we’ve seen indications from OPEC and Russian oil companies that even they think going above $60 a barrel right now would be too much and would bring on more oil from shale."

Opportunity To Buy

The fear that another wave of supply could hit the market as prices creep higher has prevented energy ETFs from fully participating in oil's latest move higher. But some analysts see that as an opportunity to buy.

"West Texas Intermediate crude oil is up over 20% since its June low but the energy sector has rebounded less than 10%. We see outperformance for the sector as it reacts to the trend of higher oil prices that are being driven by year-over-year declines in total petroleum inventories," said analysts at Ned Davis Research Group.

They recommended buying energy equipment and services stocks, such as those held by the $1.1 billion VanEck Vectors Oil Services ETF (OIH), over the 'big oil' stocks that dominate ETFs like XLE.

"Big oil, while possessing stronger financials, has become a darling of low-beta, high quality and dividend ETFs, which should underperform as rates rise," they explained.

 

YTD Returns For XLE, OIH

 

Contact Sumit Roy at [email protected]

 

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