Energy ETF Resumes its Losing Ways as Bears Return to Weakest Sector

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Energy ETF Resumes its Losing Ways as Bears Return to Weakest Sector

The bears may be coming back to energy stocks as oil falters.

The SPDR Energy ETF (XLE) fell 2 percent yesterday to its lowest close since March 8. It’s also the worst-performing major sector fund in the last week, down almost 4 percent.

Several negative factors are coming together to hammer energy. First is a returning glut of crude oil (@CL). Did you know that U.S. inventories rose by almost 10 million barrels last week and are at their highest level in over a year?

Stockpiles have been bigger than expected in five of the last six weeks. That contrasts sharply with a tight supplies for most of the January-March period.

Second is the reason why we have so much oil: U.S. production continues to surge. Energy Department data shows American oil fields averaging 12.2 million barrels per day in April. That’s not only a record, it’s up more than 1 million barrels since last September.

SPDR Energy ETF (XLE) with moving averages and relative strength vs. S&P 500.
SPDR Energy ETF (XLE) with moving averages and relative strength vs. S&P 500.

Third is less-than-amazing global economic growth. While U.S. gross domestic product last week surprised to the upside, other regions face headwinds. Consider some of these recent items:

  • April 30: Readings of Chinese factory activity weakened and barely managed to remain in “expansionary” mode.
  • April 23 & 29: Two separate measures of Euro Zone sentiment missed estimates.
  • April 10: The European Central Bank cites slowdown fears as a reason to keep interest rates low.
  • April 9: The International Monetary Fund lowers its global growth outlook.

Key Holdings in XLE

Here’s a breakdown of the top five holdings in SPDR’s Energy fund.

  1. Exxon Mobil (XOM): The oil drilling-and-refining giant took a beating last Friday after weak margins dragged on profit.
  2. Chevron (CVX): Aside from poor earnings last quarter, the company is also in the process of trying to buy Anadarko Petroleum (APC).
  3. ConocoPhillips (COP): The Houston-based company has recently focused production in fast-growing U.S. shale fields. That’s helped deliver strong earnings, but couldn’t keep the stock from closing yesterday at its second-lowest level of the year.
  4. EOG Resources (EOG): Another shale player, which happens to announce results this afternoon.
  5. Schlumberger (SLB): The world’s largest provider of services to oil and gas fields.

Other ETFs Following Energy

The energy sector is interesting because it has several exchange-traded funds with heavy volume. That’s useful because it makes them easier to follow and use options for leverage or hedging.

Here are two others that may be worth knowing:

  • SPDR Oil & Gas Exploration (XOP): This portfolio focuses on producers, with fewer refiners and servicers. It’s also the most active for options, averaging more than 170,000 contracts per day in the last month.
  • Market Vectors Oil Services (OIH): This one’s pretty much the opposite as XOP, targeting servicers like SLB, Halliburton (HAL) and National Oilwell Varco (NOV).
  • U.S. Oil Fund (USO): This tracks physical crude oil prices rather than companies.

In conclusion, energy has lagged the market for most of the decade thanks to weaker economic growth and a flood of supply. Oddly, crude oil has declined much less than oil-producing companies in recent weeks. The big question people may start asking soon is how long that disparity can last?

This post is part of our regular “ETF of the week” series. It focuses on exchange-traded funds with interesting news or price changes.

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