The energy sector is the second-best performer in the S&P 500 this year behind the utilities sector with exploration and production stocks and exchange traded funds driving the energy patch in a big way. The popular and volatile SPDR S&P Oil & Gas Exploration & Production ETF (XOP) , the largest ETF focusing on exploration and production companies, has been a stellar performer this year, but some market observers see more gains coming for XOP and rival ETFs.
Making the sector’s rebound this year all the more impressive is that it comes against the backdrop of still low oil prices, little help in the way of significant production cuts and massive spending reductions by global oil majors.
Plenty of skeptics remain regarding oil’s fundamental outlook. There might be something to that skepticism as many of the world’s major ex-U.S. producers of oil have not displayed a willingness to pare production. Even the output reductions in the U.S. have been modest. The good news is U.S. shale output is slightly declining, but challenges remain on the output front from OPEC producers.
“E&Ps are 40% off lows, up 17% YTD yet 50% below their 2014 highs, in a broader market that is up 7% since mid-2014. Despite recent strength, we believe there remains significant relative upside in a sector recovery over the next several years that, for E&Ps, will have a North American focus,” according to part of a Morgan Stanley note posted by Ben Levisohn of Barron’s.
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Investors remain apprehensive concerning the veracity of oil’s recent rally, a fact confirmed by the recent pullback in futures-based oil exchange traded products. Output remains another source of concern for energy investors and the issue is twofold.
First, there has been little in the way of significant output reductions from the world’s major oil-producing nations. Second, even if dramatic output reductions arrive, some energy market observers see the impact as being negligible for energy equities and ETFs.
“While we continue to believe the near-term commodity path will be volatile and a pullback is likely, we have confidence the oil market recovery is occurring and oil prices will need to be higher ($80) to deliver the production growth the world will need,” according to Morgan Stanley.
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SPDR S&P Oil & Gas Exploration & Production ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.