The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is up nearly 7% over the past month. While XLE is still saddled with a year-to-date loss, some traders believe the recent rally in the benchmark energy ETF is a sign of more bullish things to come.
Investors shouldn’t forget about the demand side either, especially with a growing global economy. Citigroup projects a greater likelihood of persistent shortage of oil than a big jump in supply over the coming quarters.
“Energy stocks have soared this month, and Todd Gordon, a technician and founder of TradingAnalysis.com, says an even bigger rally is in store for the sector,” reports CNBC. “The XLE energy-tracking ETF is up almost 7 percent in December, with energy stocks also getting a boost Tuesday as oil rallied to hit $60. From a technical standpoint, Gordon says that XLE is looking like a great buy for investors.”
Market observers believe the sector can continue its recent rebound. Current OPEC compliance with production cut plans remains above their historical average, and it usually takes between two to three quarters for inventories to normalize after the cuts. 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.
“Boris Schlossberg, managing director of FX strategy at BK Asset Management, likes one bullish trade on XLE in particular given that both the tax overhaul and rising oil prices are benefiting the sector,” according to CNBC.
Declining prices in recent years have prompted scores of major oil producers to rein in capital spending. Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.
Dow components Exxon and Chevron, the two largest U.S. oil companies, combine for about 40% of cap-weighted energy ETFs, such as XLE, the Vanguard Energy ETF (NYSEArca: VDE), iShares U.S. Energy ETF (NYSEArca: IYE) and the Fidelity MSCI Energy Index ETF (NYSEArca: FENY).
For more information on the oil market, visit our oil category.