Energy exchange traded funds have been leading the market higher over the past month. Oil prices have rallied on optimism over a solution to the Eurozone’s debt woes and improving sentiment on the global economy after the summer decline.
Energy Select Sector SPDR (NYSEArca: XLE) is up about 18% over the past month, while U.S. Oil Fund (NYSEArca: USO) has climbed roughly 14% and iShares S&P 500 (NYSEArca: IVV) has added 11%.
Crude futures briefly rose above $94 a barrel on Tuesday morning. Oil rose to the highest price in three months in New York as futures erased this year’s loss on signs of declining U.S. supplies, Bloomberg reported.
“The previous substantial inventory overhang has now been fully depleted,” Commerzbank AG analysts said in the report. “On the supply front, further hardship appears to be on the way in the form of Hurricane Rina, which is set to reach the Gulf of Mexico at the end of the week.”
Any announcements from Europe on the debt crisis on Wednesday after summit meetings could also move oil prices.
West Texas Intermediate futures have gone into “backwardation” for the first time since 2008 on Monday as trading volume spiked, Dow Jones Newswires reported. Backwardation occurs when futures prices are cheaper than the spot price. The opposite scenario is known as “contango.” [Commodity ETFs: Understanding Contango]
“We come from a situation where just a couple of weeks ago investors were worried about recession…and a lot of hedges were brought in to protect against that. We’re seeing a lot of those hedges unraveling,” said Ole Hansen at Saxo Bank in the Dow Jones report. “WTI has taken the brunt of whatever those hedges have been and those hedges are being pulled back at the moment.”
The oil ETF was up 1.6% in early trading Tuesday.
U.S. Oil Fund
