Furious rebound in $2 billion energy ETF invites skeptics

Bloomberg

The rebound in oil after a historic crash drove a surge in ETFs that track energy producers amid skeptical calls from analysts.
State Street’s $2 billion SPDR S&P Oil & Gas Exploration & Production ETF, or XOP, has jumped about 40% so far in April — on track for its best month on record. Meanwhile, the $8.8 billion Energy Select Sector SPDR Fund, or XLE, has climbed almost 20%. Both exchange-traded funds posted steep declines over the previous three months.
Oil rose after a collapse that saw prices in New York plunge below zero for the first time in history. Building optimism over a sector bailout and production cuts beginning in May have buoyed the shares of energy producers, but those actions alone won’t change the outlook for many of those companies struggling with still low oil prices, according to Bloomberg Intelligence.
“The cuts are nowhere near sufficient and leverage is too high for some within the group,” said BI analyst Fernando Valle. “At the end of the day, most of these guys can’t survive at WTI below $45 per barrel, so it’s still not a good setup.”
Treasury Secretary Steven Mnuchin said he’s considering the creation of a government lending program for US oil companies, helping to stabilise the market. Prices were hovering near $17 per barrel in New York on April 24.
April’s gains in energy-production ETFs far exceed those of the $254 billion SPDR S&P 500 ETF Trust, ticker SPY, which has risen about 8.5% this month. Even with April’s recovery, XOP has lost about 50% and XLE has dropped over 40% so far in 2020, while SPY is down roughly 13%.
XOP’s rebound represents a normalisation after investors dumped value stocks during the height of March’s sell-off, according to WallachBeth Capital.
“Remember, March saw forced liquidation after many came in long value stocks and were forced to cut risk at very bad, distressed levels,” said Ilya Feygin, a senior strategist at WallachBeth.