Energy stocks and sector-related exchange traded funds are starting to mirror the gains the crude oil market as investors grow increasingly optimistic over the long-term outlook for the oil industry.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has experienced a swift rebound, surging 24.6% over the past three months as WTI crude oil futures strengthened to $66.2 per barrel.
While the huge gains in crude oil prices have overshadowed the energy sector over the same period, oil producer stocks are finally catching up this year. Year-to-date, Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, rose 6.7% while USO gained 8.7%.
Supporting the crude oil markets, the expanding global economy has increased demand for commodities and drawn down oil inventories. For instance, according to the Energy Information Administration, U.S. crude stockpiles have declined for the past 10 consecutive weeks and are now at their lowest level since 2015.
“It now appears, which it did not for a good portion of the last four or five months, that the supply-and-demand imbalance that was driving oil prices up is going to be sustainable for the rest of 2018,” Lisa Shalett, head of investment at Morgan Stanley Wealth Management, told the Wall Street Journal.
Meanwhile, the energy industry has grown more efficient after cutting costs in response to the plunge in crude oil prices in previous years, so they are now in a better position to improve revenue at lower oil prices.
“It’s a much better-run sector today,” Stephanie Butcher, a fund manager at Invesco Perpetual, told the WSJ. “A few years ago management teams were choosing volume over value; today it’s all about cost control.”
Market observers and analysts argue that U.S. energy stocks are in a position to outperform broader equity markets this year, even if oil prices don’t move higher.
“As long as oil prices don’t collapse, equities should grind higher,” Jon Morrison, oil equity analyst with CIBC Capital Markets, told the WSJ.
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