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Crude Saw Best Month Ever: Are Energy ETFs Ready to Jump?

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After a historic collapse in April, crude price bounced back strongly in May, registering its best month in history. Crude oil spiked about 88% in May and is now about 46% below its recent January high of $65.65 per barrel. This is especially true against the backdrop of production cuts by major oil producers and an uptick in demand as lockdowns measures led by COVID-19 have been lifted globally (read: Leveraged ETFs That Have Gained More Than 80% at Halfway Q2).

Falling Output

Oil producers have started scaling back their production at record levels. OPEC, the 14-nation organization, and its allies agreed to cut production by 9.7 million barrels per day effective May 1. Per sources, OPEC+ intends to extend overall production cuts beyond May and June during their next meeting.

Additionally, Saudi Arabia has pledged to reduce its output by an additional one million barrels per day starting in June. UAE and Kuwait have announced additional cuts of 1.18 million barrels per day in June. Production has dropped to 11.4 million barrels per day in the United States from March’s record of 13.1 million barrels per day. Norway and Canada are among the other nations that have scaled back output.

Meanwhile, the stockpile is declining slowly, easing a storage crisis. The International Energy Agency (IEA) forecast lower global stockpiles in the second half of 2020, even as worries remain over a second surge in coronavirus infections in the coming months. It expects crude inventories to fall by about 5.5 million barrels per day in the second half of this year (read: Is the Worst Over for Oil ETFs?).

Rising Demand

As countries across the globe are easing restrictions, demand for oil has started to gather steam. Most notably, oil demand in China, the second-largest market in the world accounting for 15% of the world’s oil demand, is returning to pre-pandemic levels.

Chinese refineries have ramped up production since mid-April after the government eased lockdowns. Sinopec, the country's largest, saw its operations back to around 76% of capacity by the beginning of May, up from 67% two months ago. Independent refineries in Shandong province, that produce 20% of the country's output, were back to around 71% of capacity by the beginning of May, up from just 34% three months ago. Research company Rystad Energy expects Chinese oil demand to grow 13.55 million barrels a day in June, roughly equal to pre-pandemic levels.

For 2020, the IEA now expects global crude demand to fall by 8.6 million barrels a day versus its April forecast of a decline of 9.3 million barrels a day.

What About Energy ETFs?

Despite the huge surge in oil prices, energy ETFs have not kept up with the trend. This is especially true as the ultra-popular Energy Select Sector SPDR (XLE - Free Report) gained just 8.1% in May, which is much lower than an 88% surge in oil price (see: all the Energy ETFs here).

Still, SPDR S&P Oil & Gas Equipment & Services ETF (XES - Free Report) , iShares U.S. Oil Equipment & Services ETF (IEZ - Free Report) and VanEck Vectors Oil Services ETF (OIH - Free Report) has risen 19.5%, 18.7% and 17.6%, respectively. Other energy ETFs like Invesco Dynamic Oil & Gas Services ETF (PXJ - Free Report) , American Energy Independence ETF (USAI - Free Report) , and Invesco S&P SmallCap Energy ETF (PSCE) also gained in double-digits in a month.

Our View

The current trend remains impressive and calls for higher prices for ETFs in the coming months. Energy has a solid Zacks Sector Rank, being in the top 19%, suggesting continued growth for the sector.

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