The Best Energy ETF of the Week

By Jason

American drilling is down, but oil inventories are 10% higher than last year as the rest of the world keeps pumping.

It's been a bad week for energy investors. Essentially all of the large energy company-focused ETFs finished the week down, with these three being the best -- or should I say least-worst -- performers:

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IXC data by YCharts

What happened this weekOil futures were up and down this week but finished roughly flat, with West Texas Intermediate just above $40 and Brent, the international benchmark, ending below $45 on Friday. Natural gas prices continued to fall, with the Henry Hub benchmark wholesale price finishing the week down 11% to $2.13 per MMBtu.

However, there was some potential "good" news for oil and gas prices on Friday. Baker Hughes Incorporatedreleased its weekly rig-count report, and rig counts continue to decline globally. North American onshore and offshore rig counts declined by 20 from last week, leaving 943 oil and gas rigs operating. That's 60% fewer than were active one year ago. International rig counts fell about 3% from the last count between September and October and are down about 10% from a year ago. Almost all of that decline is happening in South America, while the Middle East continues to drill and pump oil at high levels -- at least for now.

According to the most recent Energy Information Administration weekly petroleum report, crude oil inventories are at levels the U.S. hasn't seen in some 80 years for this time of year, when demand is typically in a seasonal decline. Oil stocks are up about 10% from last year. That surplus of oil is a big reason oil prices have fallen in the second half of 2015:

Brent Crude Oil Spot Price data by YCharts

As to natural gas, even with the significant reduction in natural gas drilling rigs over the past year, U.S. production was up 2% from last year. Furthermore, there have been recent changes in the global supply-and-demand picture, with forecasts for expected Chinese consumption reduced by as much as 25%, which could mean that demand for exported gas won't be as robust as many have anticipated.

Impact on energy ETFsiShares S&P Global Energy Sector ETF, Energy Select Sector SPDR ETF, and First Trust North American Energy Infrastructure Fund all own shares of midstream giantKinder Morgan Inc. , while the first two ETFs are also heavily invested in two of the biggest integrated oil majors,ExxonMobil Corporation andChevron Corporation. Here's how those companies' stocks did over the past week:

CVX data by YCharts

These companies' stocks largely moved this week in relation to a lack of good news for the industry. There really wasn't anything material reported about ExxonMobil, Chevron, or Kinder Morgan, which make up well more than 30% of the holdings in both theiShares S&P Global Energy Sector ETF and theEnergy Select Sector SPDR ETF. Kinder Morgan makes up almost 8% ofFirst Trust North American Energy Infrastructure Fund, which invests in companies in the midstream segment of the energy business.

Looking aheadThe oil and gas markets continue to roil, and there's no clear end in sight. Some are predicting that OPEC producers will soon be forced to start cutting production to push prices up, but that song and dance has been playing at times for more than a year, with no result. Factor in impending increases in production from Iran soon, and it's possible that OPEC's output could increase before it falls.

At the same time, many of the companies owned in all three of these ETFs operate in segments that are less affected by oil or gas prices, while many of the producers continue to refine their operations and develop lower-cost techniques to extract oil. And the companies that can't figure out how to produce profitably at the current price will eventually get acquired or fail, while the ones that can, will grow.

This is one of the benefits of investing in these high-quality energy sector ETFs -- you gain exposure to many of the largest and best companies out there. Those are the ones that should benefit from new technology and a recovery in prices. Stay tuned for another update next week.

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Jason Hall owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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