) -- Oil service and producer ETFs have sold off due to a confluence of bad news for the sector, but these factors appear ready to reverse.

iShares Dow Jones U.S. Oil & Gas Exploration & Production

(IEO) - Get Report


SPDR S&P Oil & Gas Equipment & Services

(XES) - Get Report

are two of the better choices in this space.

Crude oil has undergone a massive slide in the past few weeks, down from more than $85 a barrel to $70 a barrel. Europe's debt crisis caused the euro to decline vs. the U.S. dollar, and the rising greenback put pressure on nearly all commodities. This crisis also generated concern about the economic recovery in Europe, at the same time that China's government is trying to slow the property market. Finally, record inventory at Cushing, OK, where the West Texas Intermediate Crude price is set, has exacerbated contango in the oil futures market, a situation where the near-month contracts are much lower than the contracts farther out in time.

ETFs for a Crude Rally

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Taking the last issue first, the contango situation is not as bad as the "super contango" witnessed in 2009 in both the oil and natural gas markets. This will eventually resolve itself, as it did last time, as output is stored or delayed in order to sell at higher prices.

As for Europe, the weaker euro is a good thing for the country's debt situation, and European equities have performed better recently. The greatest concern over the euro is in China, whose exporters will face very difficult times if the euro continues to slide.

Offsetting the pessimistic view, however, is the United States, which continues its tepid pace of recovery. Oil demand increased in March, up 3.5% year over year. Emerging markets are expanding rapidly and their demand for energy is growing too. Aside from this bullish fundamental support, the recent slide in oil prices was accompanied by the Deepwater Horizon disaster in the Gulf of Mexico, which hit the stocks of drillers and producers at the same time that crude oil's decline was knocking the sector for a loss.

U.S. Oil

(USO) - Get Report


PowerShares DB Crude Oil

(DBO) - Get Report

each fell about 19% since May 3.

Deepwater driller Transocean

(RIG) - Get Report

was already down from the disaster a week earlier, but lost another 14% over this period.

Anadarko Petroleum

(APC) - Get Report

, a minority partner in the platform with

British Petroleum

(BP) - Get Report

, also added to its losses and fell 11% since the start of May.

ETFs in the space were led lower by XES and

iShares Dow Jones U.S. Oil Equipment

(IEZ) - Get Report

, both down about 12% since May 3. These funds hold some drillers similar to RIG, although neither fund counts RIG among their holdings. I prefer XES here due to the fund's balanced approach, with less than 1.5% of assets separating the largest holding from the smallest. IEZ has almost 23% in


(SLB) - Get Report

and only 0.3% in

Pioneer Drilling



For explorers and producers, IEO and

SPDR S&P Oil & Gas Exploration & Production ETF

(XOP) - Get Report

are down about 10%. XOP has a balanced approach like XES, but IEO offers more exposure to Anadarko, at 6.3% of assets, the largest exposure of any ETF.

Occidental Petroleum

(OXY) - Get Report

is a slightly large 12.5% of assets, but number two holding


(APA) - Get Report

only accounts for 7% of assets. IEO also has solid exposure to natural gas with top-10 holdings such as

Chesapeake Energy

(CHK) - Get Report

, which recently received an investment from Temasek, Singapore's sovereign wealth fund, and Hopu Invesment Management, a Chinese private equity firm.

For direct crude oil plays, a fund such as U.S. Oil suffers due to contango. Since the fund rolls over the near month contract and purchases the next month contract, it does poorly when the difference between these contracts is large. From November 2008 through February 2009, USO severely underperformed

PowerShares DB Oil

(DBO) - Get Report

, which usually invests farther out on the curve, although it currently holds the June 2010 contract. A third option is

U.S. 12-Month Oil

(USL) - Get Report

, which mitigates contango by spreading contracts across 12 months. Of the three, DBO has performed the best during volatile periods, and is the best choice for investors who want to go this route.

Energy stocks have faced a perfect storm of a rising dollar, economic concerns, falling stock prices, and an historic disaster with a cost measured in human lives and extensive environmental damage. As the leak is fixed in the Gulf, this should ease pressure on drillers and producers. Fear may stay with us for awhile, but most of the energy ETFs outperformed the

S&P 500

Index yesterday. When crude finally turns higher, these ETFs should advance strongly.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.