After touching a low back in August, energy sector ETFs have surged, breaking back above its long-term trend lines.
The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, jumped 9.6% over the past month and is now trading above its 200-day simple moving average.
However, technical traders would note that XLE may look overbought at the moment as it shows a relative strength index reading of 80.6 – RSI is a momentum indicator that is considered pricey when above 70 or cheap when below 30.
Stabilizing oil prices are partly attributed to supporting the rebound in the energy sector, with West Texas Intermediate crude oil futures at $51.9 per barrel and Brent crude trading at $58.2 per barrel.
Consequently, the energy sector is beginning to garner a second look from market observers. For instance, UBS recently upgraded several stocks in the oil equipment and services segment, pointing to signs of improving demand for oil rigs and stabilization in the sector, CNBC reports.
“We conservatively assumed oil prices in the high-$50’s to low-$60’s by 2020 (below UBS estimate of $67/bbl WTI). However, if oil prices retrench to below $50/bbl and remain at those levels into 2020 financial risk exists given levered balance sheets,” UBS said.
Citigroup also projects a greater likelihood of persistent shortage of oil than a big jump in supply over the coming quarters. Ed Morse, global head of commodities at the bank, said that a handful of Organization of Petroleum Exporting Countries might already be pumping at maximum capacity already, and due to weak investment in exploration and development, there is a greater risk of a market squeeze once demand picks up, especially from a growing Chinese economy.
“Fear in the market has been that OPEC production will rise dramatically,” Morse said, according to Bloomberg. However, “there could be a supply gap emerging, which could point to a tighter market.
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High demand in emerging markets, along with increasing demand in Europe, could help diminish the global supply glut and propel oil prices higher.
“We see the market over the next six months going well above $60 for a simple reason … surprisingly good demand,” Adi Imsirovic, Head of Oil Trading at Gazprom Marketing and Trading, said at the S&P Global Platts APPEC conference in Singapore, as quoted by Reuters. “We see the market tightening strongly, we see oil moving out of storage quite fast.”
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