The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, gained a modest 0.40% in the third quarter, extending its year-to-date gain to 7%. While market observers acknowledge the energy sector’s fundamentals are solid, some believe current oil prices are too high.

A combination of diminished global output and rising global demand have helped reduce the global supply glut that dragged on oil prices for years. Production cuts from the Organization of Petroleum Exporting Countries and their allies have largely contributed to the cut in supply. Meanwhile, expanding economies around the world has bolstered demand for raw materials such as crude oil.

“We believe the market continues to underestimate the capacity of the shale industry to eventually throw oil markets back into oversupply,” said Morningstar in a recent note. “U.S. production reached a new high-water mark in June and should keep hitting new records, though that may come in fits and starts due to temporary Permian pipeline shortages.”

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More Oil Fundamentals

Recent domestic inventory data has also been a help to crude prices and the related ETFs. Analysts argued that the continued drawdowns in oil stockpiles, even though we are past the summer driving season, are a result of increased U.S. crude oil exports, which have been supported by the widening differential between U.S. benchmark WTI prices and the global benchmark, Brent crude.