Although oil has given back a significant portion of its recent gains, energy stocks and the commodity itself could be primed for some April upside after delivering sound performances in March. The second quarter covers some of the seasonally strong period for oil equities and the Energy Select Sector SPDR (NYSEArca: XLE) is getting going on the trend with a gain of nearly 8.8% over the past month.
As was noted earlier this week, bearish traders are acknowledging the potential for further gains for energy equities as short interest in some major oil names is dwindling.
“Many short sellers backed away from mega-oil and large energy-related companies in the two-week period that ended March 15. The retreat was led by a drop in shares sold short in Exxon Mobil Corp. (NYSE: XOM), the world’s largest energy company, which declined 5.5 million, or 11%, to 46.4 million. Exxon’s share price has recovered somewhat from a brutal sell-off and is up nearly 8% so far this year to $84,” reports Douglas McIntyre for 24/7 Wall Street.
Good news could come in the form of waning correlations between oil prices and equities. As oil prices drag on oil company shares, the correlation between stocks and oil potentially weakened to some extent, which may have benefited broad benchmark investments in the event of further crude oil weakness. However, with oil prices rebounding off 13-year lows, investors may be under-allocated toward the energy sector.
“The good news for oil bulls? The month following a substantial gain has tended to be a positive one for the commodity. When oil has risen 13 percent in a given month, it tends to rise another 1.5 percent in the month that follows — with the median move in the following month being a 3.7 percent rise,” according to CNBC.
[related_stories]Investors should realize while some energy ETFs share similarities, most vary greatly from each other. For example, XLE and rival cap-weighted energy ETFs focus heavily on the largest energy names, such as Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies.
Oil majors have tightened their belts, reducing costs by laying off thousands of workers and halted many new projects. Large integrated oil companies are expected to hold up better than drilling stocks as these giants have both upstream exploration and production, along with downstream refining operations.
“Interestingly, oil also appears to frequently build up momentum to the downside. After a down-13 percent month, crude has fallen an average of 3.2 percent in the month that has followed,” adds CNBC.
Energy Select Sector SPDR
