Market Overview

Is It Finally Time For Oil ETFs To Shine?

Is It Finally Time For Oil ETFs To Shine?

This has been a rough year in the oil patch. The United States Oil Fund (NYSE: USO) is lower 10 percent and that is with the benefit of a 6 percent gain over the past month. Of course, that means pain for the energy sector.

Energy, the seventh-largest sector weight in the S&P 500, is the worst-performing group in the benchmark U.S. equity index this year. The Energy Select Sector SPDR (NYSE: XLE), the largest energy ETF by assets, is lower by almost 10 percent while the more volatile SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) is down almost twice as much as XLE.

Energy stocks and ETFs have, to their credit, recently been perking up and there are an array of geopolitical and other catalysts that could spark more upside in the energy patch.

OPEC And Geopolitics

As is usually the case with oil prices, the Organization of Petroleum Exporting Countries looms large. In fact, OPEC is again at the intersection of geopolitical affairs, some of which could portend more upside for crude.

“Over the weekend, Iran successfully test-fired a new long-range ballistic missile that can carry several warheads to hit multiple targets,” said Rareview Macro founder Neil Azous in a note out Monday. “The test came hours after the locally-made missile was unveiled at a military parade in Tehran.”

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In addition to Iran's latest bout of saber-rattling, Qatar, another OPEC member, is likely to be expelled from the Gulf Cooperation Council (GCC) and, as Azous points out, Kuwait and Oman could depart the GCC as well as displays of support for Qatar. Kuwait and Oman are also OPEC members. Then there is OPEC member Venezuela, which is almost assuredly heading toward a sovereign debt default.

Bullish Tweaks

For the first time in what feels like an eternity, some oil market observers are boosting their price forecasts.

“Even if it is only modest, paid forecasters are now tweaking their crude oil estimates higher for the first time in three years,” said Azous. “However, what is most noteworthy regarding the commentary we read is that it focused on the demand side of the supply/demand equation. This is important to recognize because the narrative over the last three years has been overwhelmingly about supply, never demand.”

Investors are displaying modest enthusiasm for energy ETFs. While XLE has seen third-quarter outflows of $165.5 million, XOP has added $243.5 million since the start of the current quarter.

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