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Is the Nightmare Over for Coronavirus-Infected Energy ETFs?

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Though the outbreak of coronavirus has shaken the broader stock market badly, the energy sector has been hit hard. This is especially true as the ultra-popular Energy Select Sector SPDR XLE has shed 12.2% so far this year compared to a gain of 0.7% for the broad market fund SPY.  

Coronavirus Impact on Sector

The sharp decline came on oil price collapse as the fast-spreading deadly virus has resulted in a slowdown in energy consumption amid a well-supplied oil market. This has extended the worst start to oil price since 1991 and pushed the commodity into bear territory. Both Brent and U.S. crude are down by more than 20% from this year's peak on Jan 6.

According to Bloomberg, China’s oil demand has dropped by roughly 3 million barrels a day, or 20% of total consumption due to the virus’ impact on the nation’s economy. The drop represents the largest demand shock the oil market has suffered since the global financial crisis of 2008 to 2009, and the sudden most since the Sep 11 attacks. The effects have started to send ripples across the globe as some Chinese refineries slow down or halt operations and cargoes of West African oil are being resold (read: Virus Scare Weighs on Oil ETFs: Go Short for the Near Term).

President Donald Trump has declared a public health emergency over the coronavirus outbreak, ordering up to 14 days of quarantine for citizens returning from China’s Hubei province and denying entry to some foreigners. This has resulted in travel disruptions and the suspension of flights to China, leading to economic slowdown. This in turn is hurting energy demand, including jet fuel.

Energy ETFs Performance

Among the worst performers this year, Invesco S&P SmallCap Energy ETF PSCE was the biggest loser, tumbling 23.5%. Invesco Dynamic Energy Exploration & Production ETF PXE, First Trust ISE-Revere Natural Gas Index Fund FCG, Invesco Dynamic Oil & Gas Services ETF PXJ and SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) has shed more than 20% this year (read: Best & Worst ETFs of Coronavirus-Affected January).

PSCE targets the small-cap segment of the broad energy sector and offers exposure to the companies engaged in the business of producing, distributing or servicing energy-related products, including oil and gas exploration and production, refining, oil services and pipelines. PXE targets the companies engaged principally in exploration, extraction and production of crude oil and natural gas from land-based or offshore wells.  

FCG follows the index, which derive a substantial portion of their revenues from the exploration and production of natural gas. On the other hand, PXJ offers exposure to the companies that are engaged in the drilling of oil and gas wells; manufacturing oil and gas field machinery and equipment; or providing services to the oil and gas industry, such as well analysis, platform and pipeline engineering and construction, logistics and transportation services, oil and gas well emergency management and geophysical data acquisition and processing (read: 4 Sector ETFs That Beat the Market in Q4).

XOP invests in the oil and gas exploration and production segment of the broad sector with exposure across large, mid and small-cap stocks.

Is Turnaround On The Way?

The Organization of Petroleum Exporting Countries (OPEC) and its allies including Russia are reportedly in discussion for deeper output cuts by another 500,000 barrels a day to stabilize the coronavirus-infected oil prices. They are considering holding a ministerial meeting on Feb 14-15, earlier than the current schedule for a meeting in March. The OPEC and its allies have already been reducing oil supplies by 500,000 barrels per day through the first quarter of 2020, bringing the total production cut to 1.7 million barrels per day.

Per Wall Street Journal, another option being considered is a temporary cut of 1 million barrels a day by the Saudi Arabia to support the market.

Meanwhile, the initial U.S.-China trade deal, political instability in the Middle East and global monetary easing policies continued to support the positive outlook for the oil market. All these developments will definitely prop up energy stocks higher, suggesting that the nightmare might be over for the sector (read: Can Energy ETFs Rebound as China Promises Ramped-up Purchases?).

At the current level, after a brutal decline, most of the energy ETFs have become extremely cheap, suggesting a nice entry point for investors. As a result, investors could do some bargain hunting on the products. However, our ranking system takes into account the asset class outlook, which is negative for energy and hence most ETFs in that space have a Zacks Rank #4 (Sell) or 5 (Strong Sell).

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