Shale Supply Issues for Energy Stocks, ETFs

This article was originally published on ETFTrends.com.

The SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) is off 8.3% year-to-date even as futures-backed oil exchange traded products are delivering solid returns. 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 as the U.S. is awash in abundant oil supplies.

Advances in U.S. shale oil production technologies are contributing the to supply surplus and weighing on any oil price gains. It has become much cheaper for the upstart U.S. shale producers to extract oil out of the ground, sparking U.S. oil output to its highest levels since the 1970s.

“Crude fundamentals look healthier than they’ve been for years, largely due to voluntary curtailments from OPEC and its partners. By giving up 1.8 million barrels per day combined, this group has engineered a temporary supply shortage in an effort to realign global inventories with long-term averages,” said Morningstar in a recent note.

Related: Second Quarter Could be Rough on Energy ETFs

Shale Issues

Market observers and analysts argue that U.S. energy stocks are in a position to outperform broader equity markets this year, even if oil prices don’t move higher. The energy industry has grown more efficient after cutting costs in response to the plunge in crude oil prices in previous years, so they are now in a better position to improve revenue at lower oil prices.

“Growth from U.S. shale still looms large. Crude prices have largely held above $60 per barrel for West Texas Intermediate in 2018, which provides an attractive economics for many U.S. producers. Eventually, we expect pain for oil prices as growing U.S. production serves as the primary weight to tip oil markets back into oversupply,” according to Morningstar.

Some analysts have recently turned bullish on the energy sector, arguing that the sector is attractively valued and that the group has grown more efficient after cutting costs in response to the plunge in crude oil prices in previous years, so they are now in a better position to bolster revenue even at lower prices.

Related: Why Investors Should Include Global ETFs

“When the rig count does decline, there will be an additional overhang related to the lag between drilling a well and bringing it on line. Nothing is ever certain in the world of oil, but a crude awakening for energy investors could very well be near at hand,” according to Morningstar.

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