An Oil ETF Looking For More Of The Same In 2017

December 29, 2016 8:38 am
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The energy sector has risen from the ashes in 2016. After being one of the worst-performing groups in each of the past two years, energy, the S&P 500's seventh-largest sector weight, is one of the best-performing segments in the S&P 500 this year.

Just look at the iShares Dow Jones US Energy Sector (ETF) (NYSE: IYE). IYE, one of the more basic energy exchange-traded funds on the market, is up nearly 26 percent year-to-date. IYE's fortunes are determined by two stocks — Dow components Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX). Exxon and Chevron, the two largest U.S. oil companies, combine for nearly 36 percent or IYE's weight.

Another Oil ETF

Investors can focus on more volatile exploration & production stocks with ETFs such as the iShares Dow Jones US Oil & Gas Exp.(ETF) (NYSE: IEO), which is higher by more than 25 percent year-to-date. However, a bet on an exploration & production ETF like IEO is a more direct wager oil prices.

“We see oil trading in a range of $50 – $65 a barrel throughout 2017. The pace of an ascent to the top end of this range will likely depend on how quickly the global oil market moves from oversupply to a deficit. We see this happening in the first half of 2017. A key risk to this scenario would be increased production from Libya and Nigeria — two OPEC countries exempted from the agreement,” said BlackRock in a recent note.

Profiling IEO

The $389.2 million IEO holds 53 stocks, most of which are large-cap names. For example, ConocoPhillips (NYSE: COP), EOG Resources Inc (NYSE: EOG) and Anadarko Petroleum Corporation (NYSE: APC) combine for about 27 percent of the ETF's weight.

As independent oil and gas producers with no refining operations, those names and other members of IEO's roster can be sensitive to oil prices. In fact, BlackRock argues it might be wise to shy away from big integrated oil names.

Argument Against Running Toward Integrated Oil Names

“Stronger oil prices should benefit North American energy equities, especially the low-cost producers that focus on on-shore projects, we believe. These producers are better positioned to navigate shorter cycles in the supply-demand dynamics of the oil market. Refiners could benefit too, if global oil demand surprises on the upside. We’d shy away from larger integrated oil companies, as their often costly off-shore projects make them less nimble,” said BlackRock.

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