The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, gained almost 2% last week but finished the first quarter with a loss of more than 6%, highlighting the energy sector’s status as the worst first quarter laggard.
With the energy sector’s first-quarter lethargy, there have been plenty of market observers voicing the opinion that the sector is poised to rebound. Some analysts believe the energy sector’s growth prospects remain attractive following the dip to start 2017.
Some analysts believe the energy sector can deliver upside for investors later this year. Energy is one of a small amount of sectors that still trades at a noticeable discount relative to long-term averages. Additionally, the energy sector is usually among one of the largest sector weights in value ETFs, underscoring the point that the group is attractively valued relative to some defensive sectors, which trade at lofty multiples.
However, some traders are not convinced and caution about betting on an energy sector rebound.
“The energy slump that we saw really was about natural gas, not about oil, because oil was actually doing reasonably well, and we had very a high compliance within OPEC. So everybody was reasonably positive on oil stocks, while natural gas got hit by the double whammy; they went into the winter with huge stockpiles, and then the winter was very warm, and so we had very low demand, and that’s what really killed the energy sector,” said Gina Sanchez, CEO of Chantico Global, in an interview with CNBC.
Rig counts have recently ticked higher and with credit and earnings issues improving for some U.S. shale drillers, those companies may seize the opportunity to exploit higher pricing in the near-term. Global energy ETFs are struggling, too. Just look at the iShares Global Energy ETF (NYSEArca: IXC), which is also lower on a year-to-date basis.
XLE and other energy ETF’s have worrisome technicals in the eyes of some technical traders.
“A mixture of fundamental and technical factors are going to send oil lower, including rising rig counts and production. The Energy Select Sector SPDR ETF, the XLE, is stuck in a “tremendous” downward sloping channel,” Bill Baruch, senior market strategist at IiTrader, said to CNBC.
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