For much of this year, the energy sector has been a solid group, but recently, some of that strength has evaporated. The Energy Select Sector SPDR (NYSEArca: XLE) and rival equity-based energy exchange traded funds (ETFs) are trading lower just as oil and the energy sector are entering their seasonally weak periods.

Historical trends also indicate several equity-based energy ETFs also perform poorly late in the second quarter and into the third quarter. Additionally, several of the S&P 500 that typically perform poorly in May are energy stocks.

“The performance of the energy sector has been one of most counter-intuitive outcomes in the stock market this year given the rise in oil prices in 2019,” reports Andrew Addison for Barron’s. “West Texas Crude Oil is up 40% year-to-date, with Brent Crude rising 35%. There has been a pickup in merger activity in the group, with Chevron (CVX) and Occidental Petroleum (OXY) fighting over Anadarko Petroleum (APC). Yet in the face of these seemingly bullish developments, the energy sector’s performance has been abysmal.”

“Abysmal” may be a harsh way of describing the energy sector’s performance this year, but over the past week, XLE is lower by 3.73%, trimming its year-to-date gain to just under 13%.

What’s Next for Energy Fundamentals?

Looking ahead, fundamentals are improving. The International Energy Agency projects consumption to increase each quarter of 2019 year-over-year, albeit at a slower-than-usual pace for the first quarter. Meanwhile, on the supply side, Saudi Arabia and other members of the Organization of Petroleum Exporting Countries have been cutting output. Additionally, U.S. sanctions on Iran and Venezuela have reduced further bets on international supplies.

“While one could certainly argue that energy stocks are closer to the end of their Bear cycle than to their beginning, there is no evidence of a bottom forming,” according to Barron’s. “A bottoming process requires that the moving averages stop declining, and that prices gain the support of their moving averages. At best, that is still many months into the future.”

Related: 8 Oil & Energy ETFs to Trade as Sector Posts Big Losses

With oil prices needing positive catalysts, the ability of OPEC to lower output is critical for the commodity’s near-term fortunes. Likewise, some market observers are concerned about U.S. shale producers keeping output high as prices decline.

For aggressive oil traders, look to the leveraged United States 3x Oil Fund (USOU) and ProShares Daily 3x Long Crude ETN (WTIU).

USOU is an exchange-traded product designed to reflect three times (3x) the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. Meanwhile, WTIU is an exchange-traded note linked to the daily compounded 3x leveraged performance of the Bloomberg WTI Crude Oil Subindex ER, less investor fees.

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

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