On the back of rising oil prices, the Energy Select Sector SPDR (NYSEArca: XLE) is up more than 3% year-to-date and nearly 9.6% over the past month. Obviously, crude’s resurgence plays a significant in that rally, but short covering of some of the big-name energy stocks held by XLE is another reason why energy stocks are on the mend.
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.
Apparently, short sellers feel they have been too heavily allocated to energy stocks.
“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.
Exxon Mobil, Chevron (NYSE: CVX) and Schlumberger (NYSE: SLB) make up about 45% of the underlying portfolios of the major energy sector ETFs, such as XLE. The broad energy sector ETFs include a large tilt toward integrated oil & gas companies, along with smaller positions in oil & gas exploration & production, equipment & services, refining & marketing & transportation, storage and drilling.
However, even as U.S. shale production remains high and there are few, if any, signs that members of the Organization of Petroleum Exporting Countries (OPEC) are prepared to pare output, some market observers the darkest clouds may have passed the energy sector.