The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF, is coming off a September gain of nearly 3%, but the energy sector remains one of the worst-performing groups in 2019 and some market observers see plenty of challenges ahead for big oil stocks amid increasing adoption of alternative energy sources.

However, if the benchmark energy ETF can hold some key technical levels, a rebound becomes a more likely proposition. During oil’s recent slide, XLE and other basic energy ETFs performed significantly less poorly than the underlying commodity. Additionally, there are signs of life on XLE’s charts.

“Every major oil and gas firm has started to invest in some kind of green energy and technologies, but those investments—even if they are a billion or two billion U.S. dollars—are tiny compared to the dozens of billions of dollars each of those companies continue to plow into their core business, oil and gas,” reports OilPrice.com.

Other Oil Factors

The trade war with China is intensifying pressure on oil prices and energy stocks, and some analysts believe oil supplies are trending higher. Looking ahead, Citigroup and JPMorgan Chase analysts project global supply will expand roughly one million barrels per day more than total demand in 2020, contributing to a surplus each quarter of next year.

“Big Oil has to find a way to reconcile the need to keep dividends (and growing them) with the growing need to not fall entirely out of favor with investors as it faces the backlash from society and activists who criticize oil companies for continuing to produce energy from fossil fuels,” notes OilPrice.com.

The expected global supply glut is also the latest threat to the Organization of the Petroleum Exporting Countries and other producers, which have already enacted production caps in an attempt to stabilize prices and balance the market. Predictably, geopolitical headwinds factor into the oil equation.

Related: An Adventurous Way to Reengage With Energy ETFs 

Investors waiting for big oil to be big players in alternative energy will likely wait awhile.

“The world’s largest oil firms already invest in green energy—including in wind, solar, biofuels, hydrogen, and electric vehicles (EVs) charging networks—but these alternatives are not their core business and will not be such for years, and probably decades, to come,” according to OilPrice.com.

For more information on the energy sector, visit our energy category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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