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Oil Price Rebounds: What Lies Ahead for Energy ETFs?

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After turning negative early this week, oil price resumed momentum on flaring tensions between the United States and Iran as well as signs of production cuts. U.S. crude surged 28% while Brent crude jumped 10% on the Apr 23 trading session (read: Oil Closes Below $20: ETFs to Gain & Lose).

Threats by President Donald Trump to destroy Iranian gunboats if they harass U.S. navy ships have again spark off tensions in the Middle East, a major oil producing region. Meanwhile, Kuwait, the No. 4 producer in OPEC, started to cut production ahead of the May 1 schedule to lift oil markets. OPEC and its allies have agreed to cut oil production by 9.7 million barrels a day starting May 1 through Jun 30 to balance the oil market.

ETF Impact

The back-to-back news led to optimism in the energy sector, pushing ETFs higher on Apr 23. In particular, SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) has been the biggest winner, gaining in double-digits. This was followed by VanEck Vectors Oil Services ETF (OIH - Free Report) , iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) and Invesco Dynamic Oil & Gas Services ETF (PXJ - Free Report) . These ETFs rose 9.7%, 8.3% and 7.6%, respectively. All these funds have a Zacks ETF Rank #4 (Sell) or 5 (Strong Sell). Below we profile these ETFs in detail:

XES

This fund tracks the S&P Oil & Gas Equipment & Services Select Industry Index, which measures the performance of companies engaged in the oil and gas equipment and services industry. It charges 35 bps in annual fees and trades in solid volume of 163,000 shares a day on average. The fund has amassed $67.8 million in its asset base.

OIH

It tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $304.9 million, it charges 35 bps in annual fees from investors and trades in average daily volume of 606,000 shares (read: Earnings Help Oil Services ETFs Survive Energy Rout).

IEZ

This fund offers exposure to U.S. companies that provide equipment and services for oil exploration and extraction by tracking the Dow Jones U.S. Select Oil Equipment & Services Index. It has amassed $42.4 million in its asset base and charges 42 bps in annual fees. The product trades in average daily volume of 124,000 shares.

PXJ

This product follows the Dynamic Oil Services Intellidex Index, which thoroughly evaluates companies based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. It has accumulated $5.1 million in its base and trades in average daily volume of 34,000 shares. The ETF charges 63 bps in fees per year.

What Lies Ahead?

Despite the rally, the outlook for the sector looks bleak. This is especially true as the S&P 500 Energy Index is still down more than 42% year to date and more than 15% over the past five years (read: 5 ETF Areas Set to Soar on Historic Oil Price Collapse).

The weak trend is likely to continue as the coronavirus pandemic has brought the economy to a standstill, leading to an unprecedented fall in demand and rise in stockpiles. The International Energy Agency warned of the lowest oil demand in 25 years. It expects oil demand in April to fall below last year’s average by 29 million barrels per day to levels not seen since 1995. Oil demand is expected to drop 23.1 million barrels per day in the second quarter before a gradual recovery in the second half of the year.

Meanwhile, storage at Cushing — America’s key storage hub — has grown to more than 15 million barrels in the past month, up 48% since the end of February, and is expected to soon be at capacity for the first time ever. Per ClipperData Crude, stockpiles are now above 500 million barrels for the first time since June 2017. The deteriorating fundamentals have more than offset the efforts taken by OPEC to cut oil production.

However, the energy sector has been holding up well this quarter, rising more than 18%.

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