On the back of a significant output reduction announcement by the Organization of Petroleum Exporting Countries (OPEC) on Wednesday, the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy, surged more than 5%.
Reduced production from OPEC is an obvious catalyst and the energy sector is already the best-performing group in the S&P 500 this year, but there are potentially more tailwinds for the sector. Revitalized earnings could push the sector higher.
Energy Select Sector SPDR
The growth is not surprising as the energy sector has been one of the worst areas in earnings growth. For Q3 2016, the sector is expected to reveal its largest year-over-year earnings decline of 66%, the worst performance of all 11 S&P 500 sectors.
While energy companies are expected to be the largest contributor to earnings decline for the S&P 500 in the third quarter, the stabilizing crude oil prices and potential production cutbacks from major oil producers could help support sector-related exchange traded funds.
Some analysts expect the energy sector will become a positive contributor to earnings growth for the S&P 500 by the first quarter of 2017 due to a combination of higher expected oil prices and easier comparisons to weak earnings in 2016.
“Big oil earnings are poised to double next year as crude prices continue to march higher and oilfield services costs remain depressed, said Doug Terreson, head of energy research at Evercore ISI and Institutional Investor’s top-rated analyst for integrated oil,” reports CNBC.
Integrated oil stocks have refining exposure, a segment that benefits when oil prices are low due to improved margins. That can help steady diversified energy ETFs like XLE because these are not dedicated exploration and production funds.
Improving earnings “would be a welcome change for integrated oil companies, which handle everything from drilling for crude to marketing fuel. They have seen their earnings decline significantly from last year as they grind through an oil price downturn now in its third year,” according to CNBC.
For more information on the energy sector, visit our energy category.