As has been widely documented, the energy sector is the best-performing group in the S&P 500 this year and the Energy Select Sector SPDR (NYSEArca: XLE) is the best performer among the sector SPDR exchange traded funds. Obviously, crude’s resurgence plays a significant part in that rally.
A primary reason for the recent bullishness regarding crude is the production cut announced earlier this month by the Organization of Petroleum Exporting Countries (OPEC). OPEC plans to diminish output to a range of 32.5 to 33.0 million barrels per day from its current estimated output of 33.24 million barrels per day. While Saudi Arabia, OPEC’s biggest producer, has agreed to reduce output, Iran, Libya and Nigeria might not follow suit.
In addition to tumbling oil prices, one of the primary reasons investors ditched equity-based energy ETFs like XLE last year was the erosion of the energy sector’s allure as a dividend destination. In 2014 and 2015, no sector saw as many negative dividend actions, including cuts and suspensions, as did energy.
Previous negativity surrounding energy sector dividends could be poised to give way to good news, meaning dividend increases and perhaps renewed payouts.
However, some market observers and technical analysts believe near-term caution is warranted on energy stocks and ETFs such as XLE.
“Energy stocks have caught fire on the heals of OPEC, +$50 crude oil, and the broader market rally. But the Energy Sector rally isn’t without its concerns,” according to See It Market.
Rebounding earnings are supportive of a more optimistic dividend outlook for the energy sector.
As ETF Trends reported earlier this month: 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.
“Energy stocks have broken out as both OPEC and non-OPEC members have agreed to production cuts,” adds See It Market. “The breakout is also on good volume…but internals still lag and valuations are very high vs. history and vs. intra sector. And, bullish sentiment is at extremes with bearish seasonals coming up in January as well.”
For more information on the energy sector, visit our energy category.