ETF Trends
ETF Trends

The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF, is up more than 3% over the past week and close to 9% this month, but investors may need more convincing regarding the energy sector.

The third quarter is historically unkind to the energy sector, arguably making the group’s recent strength all the more impressive. 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).

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.

“Here’s the story this time: Oil supply is tightening. OPEC compliance with production levels has increased. The shale guys have increased activity, but not as much as some feared, and demand numbers have been steadily on the increase,” reports CNBC.

Obviously, production is a key element in the decision-making process regarding energy investments. Currently, oil investors face conflicting reports regarding output. For example, Venezuela’s crude output is plunging to multi-year lows while Algeria is looking to boost production.

“The first big energy rally occurred at the election, when energy stocks climbed 10 percent into the first weeks of December. The sector was far better than the 5 percent rally in the S&P 500 at the time,” according to CNBC. “But oil stocks were already off their highs as we entered the new year. They dropped steadily for the first two months of the year and accelerated their decline when oil dropped below $50 in March. They fell 12 percent from their highs, giving back all their post-election gains. That was the first heartbreak.”

Related: Energy Sector ETFs Are Breaking Out

Currently, XLE resides less than 1% below its 200-day moving average. The ETF has not closed above its 200-day line since early April, indicating that if the fund conquers that moving average soon, it could be harbinger of more near-term upside.

Since the start of the third quarter, investors have pulled $165.5 million from XLE.

For more information on the oil market, visit our oil category.