The Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, rose 2.6% last week, but it can be said not many investors noticed. Energy, the seventh-largest sector weight in the S&P 500, is the worst-performing group in the benchmark U.S. equity gauge this year.
That much is highlighted by XLE’s 9.2% year-to-date slide and now some market observers argue that a malaise from both bearish and bullish traders is setting in regarding energy stocks. The challenge for energy equities is that some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices.
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. Some traders are not convinced and caution about betting on an energy sector rebound.
“Morgan Stanley’s Ole Slorer says both executives and investors — bears and bulls alike — showed less conviction at the firm’s recent Houston conference than any time he can remember,” reports Crystal Kim for Barron’s.
Energy’s earnings drag is evaporating as S&P 500 energy earnings are expected to be only slightly negative for the fourth quarter and offer significant upside potential moving forward in 2017. XLE currently resides near its lowest levels since prior to the U.S. presidential election in November. Exxon and Chevron combine for over 38% of XLE’s weight.
Last month, Chevron reported a first-quarter profit after reporting an annual loss last year. Exxon also revealed a dividend increase last week. The company has one of the longest dividend increase streaks among major energy firms.
Some of the struggles of oil and the energy sector this year can be pinned on investors’ concerns regarding the ability of major oil-producing nations, including the Organization of Petroleum Exporting Countries (OPEC), to effectively reduce production.
“Consistent with the shift of focus in the oil market to spot balances, it is notable heading into the May 25 OPEC meeting that oil timespread and prices are mostly unphased by the increasingly explicit OPEC headlines around an extension, with focus instead on near-term balances. This suggests a likely muted response to the announcement of an extension with more downside risks given the current negative view on 2018 balances should an extension not occur,” according to Goldman Sachs’ Jeffrey Currie by way of Barron’s.