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4 Reasons to Buy Energy ETFs Despite Surging U.S. Output

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Oil prices have been struggling since the start of this yearpouring cold water on hopes building on the OPEC output cut deal signed in late 2016. This is because instead of bringing about stabilization in the oil patch, the U.S. continued to pump oil and dampened the initial rally post OPEC deal.

Per the deal, OPEC would cut production by about 1.2 million barrels a day by January. Plus, on December 10, OPEC cut the first deal with non-OPEC members since 2001 to reduce output this year. These pacts were formed for six months. Notably, Saudi Arabia has so far been responsible for most of the output cut (read: Top ETF Stories of the Fourth Quarter).

But offsetting the positive impact of this deal, the U.S. rig count rose for the 10th successive month in March 2017. This indicates the resurgence in U.S. shale oil production. The U.S. Energy Information Administration (EIA) lately upped its forecast for crude-oil output.

The organization’s latest forecast is an average 9.9 million barrels per day for 2018, up 1.8% from the previous forecast. EIA expects 2017 output at 9.22 million barrels a day, up a decent 0.1% from the earlier guidance (read: How to Trade Oil with ETFs After Surging U.S. Output).

Can the Space Still Gain?

Despite increasing shale output, the space is looking up courtesy of some favorable factors, like those that we have highlighted below. And since oil price is one of the most vital factors of an energy company’s performance, it would be intriguing to delve deeper into the broader energy sector to see if it can march higher too.

Saudi Arabia Likely to Back OPEC Output Cut Extension

OPEC members will meetin Vienna on May 25 to discuss whether to extend the 1.2 million barrels a day output cut deal (taken place in January) for six more months. Several OPEC countries, including Kuwait, are already in favor of an extension. Plus, OPEC top-brass Saudi Arabia may also agree to the extension if other OPEC nations like Iraq and Iran, and non-OPEC Russia conform to it whole-heartedly. Saudi’s likely support means a lot to oil price.

All in all, OPEC's supply cut alliance could be extended if all major producers display active cooperation. The hint only pushed up oil prices in recent sessions. United States Oil USO and United States Brent Oil BNO added a respective 3.9% and 2.5% in the last five days (as of April 11, 2017) (read: Can Oil ETFs Rebound on Possibility of More OPEC Cuts?).

Expected Uptick in Earnings Growth

As per the Earnings Trends issued on April 6, 2017, the sector is expected to earn $8.1 billion this quarter against a loss of 1.6 billion in the year-earlier period. The sector’s revenue growth is expected to be 33% in the first quarter of 2017. Increased activity in the oil patch and easy comparison put this sector in the top bracket in terms of growth. The Zacks categorized Oil & Gas-U.S Exploration & Production industry added over 2.5% in the last one month compared with 0.62% loss recorded by the iShares Core S&P 500 (IVV - Free Report) .

Geopolitical Concerns

Oil lately got a boost from geopolitics. The closing of Libya’s largest oil field after an unidentified group blocked a pipeline and doldrums in the Middle East following the U.S. airstrike on Syria government’s airbase in response to a chemical attack by the latter on dozens of Syrians, triggered concerns over global crude supply for the near term.

As a result, oil futures logged a six-day winning streak on April 11. So, the energy sector can be considered for short-term gains should geopolitical tensions continue (read: 4 Sector ETFs to Profit from if Geopolitics Rule).

Prices to Scale Up in Summer Season?

As per IEA, U.S. regular gasoline retail prices are expected to average $2.46/gallon (gallon) in the summer driving season compared with $2.23/gal last year. EIA forecasts Brent prices to average $54.23/barrel in 2017 and $57.10/b in 2018. WTI crude oil prices are guided to average $52.24/barrel in 2017 and $55.10/ barrel in 2018.

Energy ETFs in Focus

Investors may try Energy Select Sector SPDR ETF XLE, SPDR S&P Oil & Gas Exploration & Production ETF XOP, SPDR S&P North American Natural Resources ETF NANR and iShares Global Energy IXC.

Bottom Line

Though the trend is in favor of oil investing currently, the likelihood of any protracted rebound is still less, especially given the fact that only OPEC has “outperformed its compliance record” and the U.S. is continuing to extract more oil.

With $53.51/barrel of current WTI crude price prevailing, one should not expect much upside over the long term. However, oil and energy ETFs can be exercised as long as the trend is a friend and summer demand lasts.

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