Energy ETFs Still Have Room to Fall

The price of crude oil broke below $50 a barrel last week as commodity and energy ETFs continued on a downward spiral.

The United States Oil Fund(USO Quote) has fallen 67% since crude hit a record of $147 a barrel in July. Natural gas has also taken its share of hits in recent months. The United States Natural Gas Fund(UNG Quote) has plummeted 58.5% since July.

Other ETFs in the commodity and energy industries that are reeling include the SPDR S&P Oil & Gas Exploration & Production ETF(XOP Quote), the SPDR S&P Oil & Gas Equipment & Services ETF(XES Quote) and the Energy Select SPDR ETF(XLE Quote), which have dropped 46.1%, 58.3% and 49.2% this year. These declines compare to a 47.7% retreat by the S&P 500.

After such precipitous drops in price, one has to wonder where the bottom is for some of the ETFs in this space. "Oil probably has at least another 10% to 15% of downside," said Keith Springer, president of Capital Financial Advisory Services, in an interview on Nov. 12, when oil was trading about $56 per barrel. "I would look for oil to close below $50 a barrel before I would buy it."

Tony Welch, a portfolio manager at Sarasota Capital Strategies who specializes in ETFs, also believes things could get worse before they get better for energy ETFs. "People need to understand that we are in a bear market," he said. "Energy is one of the more uncertain sectors right now."

Welch cautions against trying to pick a bottom in energy. "We are in unprecedented times," he said. "Some of the energy ETFs tend to look like they are bottoming out, but we need to see improvements, first in the general market and second in the sector. XLE is forming a technical wedge that could go either way."

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