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Buying Opportunities In Energy ETFs With The Big Drop In Crude Oil
In the past few weeks, the price of Crude Oil has plummented to a low of $83.59, rallying to close last week to $85.82 for the November Light Sweet Crude(WTI) delivery contract. These low prices of crude oil have not been seen since around July 2012 around the London Olympics time frame, and have lead to the extreme volatility of the US stock market indices. Energy stocks have been hammered in this volatile October, creating buying opportunities in Energy exchange traded funds(ETFs).
What is Causing the Slumping Price of Crude Oil?
Many factors that are contributing to the drop in the price of crude:
- Weakening global growth have sparked demand concerns for oil due to the deterioting economic conditions around the world.
- The United States Shale boom has increased the vast supply of oil in the US, squeezing crude oil prices coupled with the weaking demand. The increase of US supply and availability has balanced against supply shocks due to volatile geopolitical events such as the Ukraine/Russia conflict and the Islamic State's terrorist rise in Iraq as they march towards oil rich Baghdad.
- The rising strength of the US dollar against the other currencies, has contributed to the falling oil prices, as the US dollar has an inverse relationship with commodity prices. As the US dollar has risen the past few months, crude oil prices have dropped accordingly.
The United States economy has recently show strength and growth highlight by the September US jobs and unemployment report, but the rest of the world has lagged. Last week, the International Monetary fund warned of a eurozone recession due to slowing growth for the 18 nation euro area pressuring Germany, the most influential and powerful member, for action to reverse the trend. Speaking of Germany, the country's recent economic data has shown that exports have fallen in August by 5.8% , sparking German recession fears. The worldwide economic weakness has triggered demand concerns for crude oil.
Will the Saudis Intervene?
In the past, when worldwide crude prices would fall, the Organization of the Petroleum Exporting Countries(OPEC) would call an emergency meeting to discuss actions to prop up the falling prices. Lead by the world's largest oil producer Saudi Arabia, the OPEC members would agree to cut an assigned percentage of production to reduce supply, thus stimulating higher prices. Or, the Saudis would act alone and cut production to stimulate the crude prices. Will the Saudis intervene to defend the falling oil prices as they have in the past? The answer is "Yes", but their actions are the opposite as expected. The Saudis have instead cut selling prices of crude to buyers in Asia in September, thus trying to maintain their global market share. Fellow OPEC member and "frenemy" Iran, has matched the Saudis price cuts to its buyers sparking a possible price war among the OPEC members. Saudi Arabia seems content to let the pricing volatility continue, and OPEC does not meet again to discuss production outputs until their next meeting in Mid-November.
Buying Opportunities in Energy stocks and Oil ETFs
Energy Stocks and Oil ETFs have plummeted in the wake of decreasing oil prices, stock market weakness,and volatility creating buying opportunties for invididual investors. With the Saudis not actively participating in putting a floor on crude prices with production cuts in the immediate future, energy stocks and oil ETFs may continue to fall. However, it is impossible to call a bottom, and the individual investor should act sooner than later on the pullback.
While some may not like picking invididual stocks, Exchange Traded Funds give investors the option of buying a basket of stocks in certain sectors to fulfill their investment thesis. With the recent "haircut" in many ETFs and stocks, I wanted to review the opportunities in Energy ETFs as I believe this to be the healthy correction(and buying opportunities) that everyone was waiting for.
Energy Select Sector SPDR - XLE
The largest and my favorite Oil ETF is the Energy Select Sector "spider", the XLE. The XLE was the top performing SPDR ETF among the 9 ETFs in the family in the beginning of the year, topping out at $101.52 on June 23rd. The current price stock price, now at $83.55 during the time of this article, has plummeted near is 52 week low of $81.78 falling over 20% from its 52 week high. In recent shows of CNBC's Fast Money, both Brian Kelly and Josh Brown have become bullish on the XLE have recommended buying on weakness. The XLE is comprised of some of the largest and most widely held energy stocks.
The Top 3 equity holdings of the XLE are:
1. Exxon(XOM): 15.21%
2. Chevron(CVX): 13.00%
3. Schlumberger(SLB): 7.78%
The XLE is a safe and steady investment that pays a 1.96% Dividend Yield. The stocks comprised in the XLE are big, blue chip companies - very safe investments for a more risk-averse individual investor.
SPDR S&P Oil & Gas Exploration & Production ETF - XOP
The XOP tracks the S&P Oil and Gas Exploration stocks. The XOP is comprised of smaller cap stocks compared to the XLE which will have higher growth rates, thus more risk. The XOP is also a recommedation of CNBC's Brian Kelly. The XOP equity holdings are more diversified and the assets are more distributed among the companies. The XLE on the other hand, have about 28% weight into 2 stocks(XOM & CVX).
The Top 4 equity holdings of the XOP are:
1. Athlong Energy Inc(ATHL): 1.54%
2. Matador Resources Company(MTDR): 1.27%
3. RSP Permian Inc(RSPP): 1.23%
4. Bill Barrett Corporation(BBG): 1.23%
The demand concerns, and production glut in crude oil has caused a 20% drop in prices since the June 2014 highs, thus signaling a bear market. Energy stocks have taken a haircut, providing opportunities to buy the best energy companies for sale. An easy and safe way for an individual investor to participate into these buying opportunities would be to invest into the XLE and XOP ETFs. However, be prepared for more downside for now with the continuing crude price drop, as well as the US Stock market also showing some major weakness and volatility.