While the broader market was stumbling Tuesday, energy-related exchange traded funds surged, with crude oil rising to a one-month high after an expected tighter oil supply outlook next year.
The Energy Select Sector SPDR (NYSEArca: XLE) gained 1.7% Tuesday. Meanwhile, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, rose 3.5% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, increased 3.3%.
In the energy space, small-caps, exploration and services stocks were outperforming. For instance on Tuesday, the PowerShares S&P SmallCap Energy Portfolio (NasdaqGM: PSCE) jumped 7.6%, SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) increased 3.6%, SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) advanced 5.4%, Market Vectors Oil Service ETF (NYSEArca: OIH) rose 3.7% and iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) added 3.8%.
Additionally, the S&P Oil & Gas Exploration & Production Bull Shares (NYSEArca: GUSH), which delivers triple the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index, jumped 9.7% Tuesday.
WTI crude oil futures were up 3.8%, trading around $48.0 per barrel Tuesday. Brent crude oil futures were 4.3% higher to $51.4 per barrel.
Fueling the rally in the energy space, a monthly U.S. energy report argues that global oil demand could jump by the most in six years in 2016 while non-OPEC supply stalls, which suggests that the oil supply glut could be easing more quickly than expected, Reuters reports.
“We have reduced the probability of a return to the $37-38 area per nearby WTI,” Jim Ritterbusch of oil consultancy Ritterbusch & Associates, told Reuters. “We will maintain a long standing view that price declines below this support level are virtually off of the table.”
Additionally, Russia’s energy minister revealed that the government and Saudi Arabia are in talks over the low oil environment, hinting at possible support.
“The market is possibly moving on speculation that OPEC and non-OPEC countries will find an agreement to cooperate,” Carsten Fritsch, senior oil analyst at Commerzbank, told Reuters.
A depreciating U.S. dollar was also adding to oil gains, along with bets that the U.S. rig count could dip again this week after last week’s unexpected 26 rig decline.
Neil Azous of Rareview Macro argues that a rally in energy stocks could be underway, pointing to stabilizing prices, a 40% drop in large-cap energy stocks and a 60% fall in small-cap energy, reports Stephanie Yang for CNBC.
“You have to go back a very far time in history to find any other sector that really came close to that,” Azous told CNBC.
United States Oil Fund
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Max Chen contributed to this article.