Here are the 3 biggest risks for the energy sector as OPEC extends supply cuts
Oil and gas stocks may be running out of energy.
Even as oil-producing coalition OPEC and its allies agreed to extend their existing supply cuts for an additional nine months in a widely watched meetingon Tuesday, sending oil prices higher, there are still risks lurking in the energy sector, says one expert.
“I think one of the biggest risks that doesn’t get talked enough about ... is that commodities have gone into a bear market, and what I mean by that is they’ve gone into a trading range that can last several more years,” Mary Ann Bartels, head of ETF strategy at Bank of America-Merrill Lynch, told CNBC’s “ETF Edge.”
“That means you get great rallies, but you also get great declines, and that the trend just tends to be flat,” she said Monday.
U.S. oil prices plunged nearly 5% in intraday trading on Tuesday as worries around a global growth slowdown continued to weigh on the commodity. Prices began to recover early on Wednesday, gaining more than 1%.
But even if energy reverses course in earnest, rising prices may not be “sustainable to the upside,” Bartels said.
“There’s great companies, certainly, in that space, but we don’t see any leadership characteristics,” the ETF expert said. “The supply dynamics of the oil market have changed dramatically, especially based on the technology here in the U.S. with fracking.”
As such, “energy is not necessarily one of our top picks” in this market, Bartels said. But for investors who nevertheless want some exposure, she offered some do’s and don’ts.
First, she expected the oil services space — tracked by funds such as the VanEck Vectors Oil Services ETF — to see more pain in the coming months. She also anticipated the upside price constraints to hurt the exploration and production group, which is represented in the ETF market by the SPDR S&P Oil & Gas Exploration & Production ETF, ticker XOP.
“If you want to look at energy and reduce your exposure to oil services, we’d prefer things like the XLE, which is the [Energy Select Sector] SPDR ETF, and Fidelity’s ETF for energy, which tend to have lower exposure to the oil service [space], ” she said.
Dave Nadig, managing director of ETF.com, agreed that “this is a tough market for traditional oil stocks.”
“I also agree that XLE is the way to play it here,” he said in the same “ETF Edge” interview. “You’re getting much more exposure to refiners and marketers who really are just going to be subject to daily demand and not so beholden to changes in OPEC.”
Nadig, whose website covers the ETF world in its entirety, also said he saw a recent uptick in alternative-energy ETFs, including Invesco’s Solar ETF, which hit a new 52-week high on Tuesday, and First Trust Global’s Wind Energy ETF.
Still, Nadig recommended sticking with the XLE via what he saw as “a really interesting pairs trade opportunity here: going long something like [XLE] and just shorting out that exploration, production and services business that may not do so well. That’s a fund like XOP. So, one of the great things about ETFs is you can use them to go both directions.”
The XLE declined in early trading on Wednesday.
Disclosure: Bank of America Securities together with its affiliates beneficially owns 1% or more of the shares of XLE.