The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is up about 9% this month, underscoring the point that energy sector has recently been one of the best-performing sectors.
However, some market observers believe the sector faces challenges and will give back some of its recent gains. Oil prices recently rallied after the U.S. dropped out of the Iran nuclear accord and added new sanctions against the country, which is a member of the Organization of Petroleum Exporting Countries (OPEC). Some investors argue that catalyst may be overstated.
“Iran’s oil exports were down by around 1 million barrels per day under sanctions before the 2015 deal was reached. This time, analysts expect much less of an impact. It’s important to note that the U.S. doesn’t import any oil from Iran, so American sanctions will have no direct effect on Iranian oil exports. It’s a matter of seeing if other countries follow the U.S. or not,” reports Evie Liu for Barron’s.
Different This Time for Energy, Oil?
Crude oil prices have increased more than 10% over the past month after President Donald Trump signaled it is likely the U.S. will withdraw from a 2015 international agreement with Iran that eased sanctions in return for curbs to the country’s nuclear program, the Wall Street Journal reports.
Related – Energy ETF Rally: About More Than Just Iran
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.
“Iran sells most of its oil to European and Asian countries. Unlike last time, when a broad international coalition supported the sanctions (wary that the Iranian nuclear program could reach a tipping point), many nations now oppose the reimposition of sanctions,” according to Barron’s. “EU leaders have already stated their continuous commitment to the Iran deal. Japan and South Korea might comply with the reimposition to keep good ties with the U.S., but might also seek exemptions to minimize damage. India’s foreign secretary said the country wouldn’t go along with the U.S. China’s response is not clear yet.”
Rivals to XLE include 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 energy category.