The energy sector is the only one among the 10 S&P industry groups that is currently in the red for both one and three-month periods. Domestic crude oil production is at its peak since the late 80’s. In addition to the oversupply factor, easing of geopolitical tensions and stronger dollar has led to decline in energy prices, dragging the energy sector lower. Obviously, crude price movement affects the oil exploration and production (E&P) companies.

On that note, exiting certain energy funds will be a prudent move for risk-averse investors. Volatility cannot be ruled out.

Crude Price Worries

Crude prices are most likely to exhibit a sideways-to-bearish trend in the coming months, mostly trading in the $90-$100 per barrel range. As North American supply remains strong and the groundbreaking agreement with Iran makes it easier for the country to sell the commodity, we are likely to experience a pressure in the price of a barrel of oil.

A stronger greenback creates a vicious circle for oil price by making imports cheaper at a time when bearish inventory data are creating demand worries. The future of oil price is further wrinkled by the U.S. Energy Information Administration prediction that by 2015, imports of crude oil and refined fuels should fall to an average of just 21% as U.S. shale oil production increases. By contrast, imports accounted for about 40% of the total domestic consumption in 2012.

Meanwhile, the possibility of a rate hike by the Federal Reserve has resulted in a more pronounced flight toward U.S. government bonds and bond proxies. In the country’s oil market, this flurry of bonds has sparked concerns about the future direction of crude price and threatens investor sentiment.

IEA Cuts Demand Growth Forecast

Meanwhile, International Energy Agency recently said that demand growth in the second half of 2014 will slowdown to its lowest level in two and a half years. The latest numbers from the agency predicts demand growth to slow down to below 500,000 barrels per day (b/d) in the last half of this year. Also for 2014 and 2015, global oil demand growth targets have been downgraded to 900,000 million b/d and 1.2 million b/d. This comes after IEA had downgraded last month its 2014 forecast to 1.0 million b/d.

IEA said that the effects of violence in Iraq and Libya on “global oil market balances and prices remains muted amid weakening oil demand growth and plentiful supply.” The agency also echoed that the US production continues to trend up while output from the OPEC (Organization of the Petroleum Exporting Countries) is still higher than its official supply target of 30 million b/d.

Ban on Russian Oil

Separately, the US and European Union has imposed new sanctions against Russia, which also includes restriction on Western companies to cooperate with Russian energy companies. Reportedly, the US and the European Union (EU) may stop the oil hunt in unconventional oil fields that include the Arctic territory, deep seas or shale formations for crude. The sanctions raise concerns about what happens to oil majors like Exxon Mobil Corp. (XOM -Analyst Report), BP p.l.c. (BP - Analyst Report), Royal Dutch Shell plc (RDS.A) and TOTAL S.A. (TOT - Analyst Report) among others. (Read: What Happens to Exxon, BP if US, EU Ban Russian Oil Hunt)

3 Energy Funds to Sell Now

Here we will suggest 3 energy funds that carry either a Zacks Mutual Fund Rank #4 (Sell) or Zacks Mutual Fund Rank #5 (Strong Sell) as we expect the funds to underperform its peers in the future.

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds also carry sales load and have higher expense ratio.

Ivy Global Natural Resources A (IGNAX - MF report) seeks capital appreciation. It invests heavily in equity securities of companies across the globe, whose primary operations are related to natural resources, including suppliers and service providers. A minimum of 65% of its assets are invested in a minimum of three countries and may include domestic firms.

The fund carries a Zacks Mutual Fund Rank #5 (Strong Sell). The fund has an annual expense ratio of 1.56% as compared to category average of 1.45%. It also carries a max front end sales load of 5.75% as compared to category average of 5.24%.

The fund has returned -1.4% and -2.7% in the last four weeks and three months, respectively.

The fund’s top holdings include Halliburton (HAL - Analyst Report), Schlumberger NV (SLB - Analyst Report) and Dow Chemical (DOW - Analyst Report).

Rydex Energy A (RYENX - MF report) seeks capital growth. It invests a lion’s share of its assets in domestic energy companies. It may invest in companies ranging from small to medium market capitalization. It may also invest in ADRs and domestic government securities.

The fund carries a Zacks Mutual Fund Rank #4 (Sell). The fund has an annual expense ratio of 1.62% as compared to category average of 1.47%. It also carries a max front end sales load of 4.75%, which however is lower than category average of 5.24%.

The fund has returned -2% and -5.3% in the last four weeks and three months, respectively.

The fund’s top holdings include Exxon Mobil, Chevron Corp (CVX - Analyst Report) and Schlumberger NV.

Saratoga Energy & Basic Materials A (SBMBX - MF report) invests a lion’s share of its assets in equities of US and non-US energy and basic materials companies irrespective of their market capitalization. The fund uses Standard & Poor's classification system for identifying which companies belong to energy or basic materials sector. The fund may also in adverse conditions, invest in investment grade debt securities temporarily, thus making the portfolio vulnerable to achieve its desired investment objective.

The fund carries a Zacks Mutual Fund Rank #4 (Sell). The fund has an annual expense ratio of 3.40% as compared to category average of 1.45%. It also carries a max front end sales load of 5.75% compared to the category average of 5.24%.

The fund has returned -1.6% and -7.7% in the last four weeks and three months, respectively.

The fund’s top holdings include Exxon Mobil, Suncor Energy (SU - Analyst Report) and Noble Energy Inc (NBL - Analyst Report).

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.

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