Despite a pessimistic outlook for the crude oil market, energy sector exchange traded funds are rallying along with the broader market.
In the past five trading sessions, the Energy Select Sector SPDR (NYSEArca: XLE) gained 3.7%, whereas the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, declined 7.0%, suggesting that investors may be picking up cheap energy stocks after the broad sell-off. [Contrarian ETFs to Capitalize on Year-End Tax Selling]
The energy sector has been the worst performing S&P 500 sector year-to-date. The S&P 500 Energy Sector Index is down 13.0% so far this year while XLE is 11.6% lower. Consequently, the selling pressure this year has pushed down XLE’s price-to-earnings ratio to 13.2 and price-to-book to 1.7, making energy stocks some of the of the cheapest in the U.S. markets. In contrast, the S&P 500 index shows a 17.1 P/E and a 2.4 P/B.
“It’s too soon to say whether this is a dead cat bounce or whether it’ll go lower, as nothing has changed. It may just be a pause, and the energy sector is in an oversold rebound,” Mark Luschini, chief investment strategist at Janney Montgomery Scott, said in a CNBC article.
Meanwhile, WTI crude oil futures are trading near $55.7 per barrel while Brent crude oil is at $60.4 per barrel, and it looks like crude prices could remain depressed over the foreseeable future.
Saudi Arabia, the largest member of the Organization of Petroleum Exporting Countries, stated that they will need the support of other big producers to curb oil output and lift prices, Reuters reports. However, others are content with pumping more oil.
For instance, Russia has stated it would not cut production even if oil dipped below $60 per barrel.
“In a situation like this, it is difficult, if not impossible, for the kingdom or for OPEC to take any action that would reduce its market share and increase the shares of others, at a time when it is difficult to control prices,” Ali al-Naimi, Saudi Arabia’s oil minister, said in the Reuters article.
Moreover, the International Energy Agency does not expect a rebound in oil prices anytime soon, reports Tom DiChristopher for CNBC. The IEA points to diminished demand growth next year from former Soviet Union area, China and a number of oil-producing countries.
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