Libya Conflict Energizes Energy Sector ETFs
Oil prices soared to five-month highs last week as fears over a civil war breaking out in Libya added concerns that a conflict in the OPEC member nation could affect global supply. Tensions flared when rebel forces loyal to warlord Khalifa Haftar launched a surprise assault against Tripoli, the home of Libya's UN-recognized government.
Libya was producing 1.2 million barrels a day before the Tripoli clashes. A significant drop in production could cause sudden price spikes in the liquid commodity. The North African country with a population over 6 million has experienced political unrest since 2011, when then head of state Muammar Qaddafi was removed from office and killed.
"I think the market hasn't concentrated on Libya as much as it perhaps should've done. At the moment we do see a threat to Libyan supplies in the short and medium term," said Paul Horsnell, head of commodities research at Standard Chartered, per CNBC.
The unrest in Libya comes at a time when oil markets have faced upward pressure from a six-month OPEC supply cut of 1.2 million barrels per day (bpd) between January and June that may continue into the second half of 2019, depending on market conditions.
Those who believe the conflict in Libya may escalate and continue to push oil prices higher should add these three energy sector exchange-traded funds (ETFs) to their watchlist. Let's take a further look at each fund and actionable technical levels to trade.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
With assets under management (AUM) of $276.46 million, the iShares U.S. Oil & Gas Exploration & Production ETF (IEO) seeks to deliver similar investment results to the Dow Jones U.S. Select Oil Exploration & Production Index. As its name suggests, the ETF provides exposure to U.S. equities in the oil and gas exploration and production sector. Its portfolio is relatively top heavy, with the top 10 holdings carrying a weighting of nearly 65%. The fund suits all forms of trading with a competitive 0.43% expense ratio and ultra-thin average spread of 0.05%. IEO issues a 1.56% dividend yield and has gained 19.97% year to date (YTD) as of April 16, 2019.
The fund made most of its YTD gains in the first few weeks of January. Since that time, it has traded mostly sideways as the bulls and bears struggled for control. Price broke above the trading range Friday, April 13, as tensions in Libya escalated. Traders should look to open a long position on a retracement to the range's top trendline, which now acts as a significant support level. Think about booking profits near $70 – an area the price may encounter resistance from a horizontal trendline that connects several 2018 swing lows. Limit risk by setting a stop-loss order just below the 50-day simple moving average (SMA) and moving it to the breakeven point if price reaches the 200-day SMA.
Invesco S&P 500 Equal Weight Energy ETF (RYE)
Launched in 2006, the Invesco S&P 500 Equal Weight Energy ETF (RYE) tracks the performance of the S&P 500 Equal Weight Energy Index, which comprises companies in the U.S. energy sector. The fund's equal weight structure gives it a substantial tilt toward midcaps – as a result, RYE underweights large refiners and provides more exposure to smaller exploration and production players in the industry. Once again, the ETF complements all trading styles with its 0.04% average spread, 0.40% management fee and daily turnover of over 50,000 shares per day. As of April 16, 2019, RYE has $200 million in AUM, yields 1.90% and is up 23.68% on the year, making it the best performing fund of the three discussed.
Like IEO, the RYE share price added a large portion of its YTD gains in the first few weeks of 2019 but has trended more upwards compared to that fund since. A broad ascending triangle on the ETF's chart between December and mid-April appears to be acting as a bottoming formation, with the price breaking above the pattern's upper trendline in Friday's trading session. Those who want to trade RYE should buy pullbacks to the initial breakout point at $52 and set take-profit orders at the $58 level, where the price may hit resistance from the 2018 August and September swing lows. Close open trades if the fund's price falls beneath this month's low at $49.93.
The Invesco Dynamic Energy Exploration & Production ETF (PXE)
The Invesco Dynamic Energy Exploration & Production ETF (PXE), created in 2005, attempts to provide similar returns to the Dynamic Energy Exploration & Production Intellidex Index. The benchmark comprises U.S. energy exploration and production companies based on specific valuation and growth metrics. Key holdings in the ETF's basket of 29 stocks include Hess Corporation (HES), Anadarko Petroleum Corporation (APC) and Occidental Petroleum Corporation (OXY). On Friday, March 12, Chevron Corporation (CVX) made a $33 billion cash and stock deal to acquire Anadarko, effectively snuffing out a rival bid by Occidental. The smart-beta fund has $42.43 million in net assets, charges a 0.65% management fee, offers a 1.19% dividend yield and is up 17.77% YTD as of April 16, 2019.
PXE shares are trading up almost 30% since their Dec. 26 low, placing the fund firmly in bull market territory, but shares have remained range bound over the past three months. The relative strength index (RSI) sits below its overbought threshold, indicating that the ETF's price has room to move higher before consolidating. Traders should look for an entry point on retracements to the $20 level, where the price gains support from the previous trading range's upper trendline. Consider scaling out of the position, selling half at the 200-day SMA and the remaining half near the August 2018 swing low. Consider using the 50-day SMA for stop placement.
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