​Small-Cap Oil Stocks Up Despite OPEC Fallout

Henry Truc  |

The failed talks at this Sunday’s OPEC meeting in Doha sparked a sell-off in the energy space, with the price of WTI falling by almost 7% in early trading Monday, but has since recouped most of its losses to more manageable 1.5%. Still, the drop pushes oil below the key $40 level, which had been a significant psychological driver for energy bulls as of late.

Oil had enjoyed a nice run-up in the past two weeks heading into the OPEC meeting–which also included as many as 18 non-OPEC oil-producing nations–jumping from about $35 to just north of $42 before Monday’s decline.

OPEC Head Fakes

At the crux of the volatility is on-again off-again talks to freeze oil output by OPEC. The 13-member global oil cartel has faked out energy bulls twice already this year—the first being in February. This time around, investors were optimistic that Saudi Arabia would be more open to the idea of freezing production levels given that the country had been reportedly working with Russia to establish an output cap.

That all changed over the weekend when Saudi Arabia decided to take a harder stance, particularly regarding Iran’s participation. Iran, meanwhile, has been focused on increasing its own production since the recent lifting of harsh sanctions via the Iran nuclear deal. The country has expressed no interest in participating in any production freeze. This does not sit well with Saudi Arabia.

Energy Stocks Up, Oil ETFs Down

While energy ETFs like iPath S&P GSCI Crude Oil TR ETN (OIL) and United States Oil (USO) traded lower with the underlying commodity, oil stocks actually traded higher. The Energy Select Sector SPDR ETF (XLE) gapped lower but has been trading 1.5% higher on the day.

The small-cap arena is holding up even better on the day. PowerShares S&P SmallCap Energy ETF (PSCE) is up over 2% on the day. Components for the small-cap ETF (and size held according to ETFdb) include PDC Energy, Inc. (PDCE) [16.7%), Carrizo Oil & Gas (CRZO) [10.4%], US Silica Holdings, Inc. (SLCA) [8.7%], Synergy Resources Corp. (SYRG) [5.5%], and SEACOR Holdings (CKH) [5.3%].

But while PSCE has drastically underperformed XLE for the duration of the oil price collapse, it’s been outpacing its larger-cap counterpart recently. Over the past three years, PSCE has fallen 60.3% versus the XLE’s 12.5%. However, in the past 13 weeks, PSCE’s 25.7% gain has scorched the XLE’s impressive 17.7% gain. Considering that energy stocks found willing buyers pretty quickly on what was initially perceived as another big letdown from OPEC, combined with a risk-on environment in which small caps are outperforming large caps, this all adds to the bullish case that the bottom for oil may be in.

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