The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, is still saddled with a year-to-date loss in excess of 10% and the energy sector is still the worst-performing group in the S&P 500, but some market observers believe those themes will change in favor of energy bulls.
Declining prices in recent years have prompted scores of major oil producers to rein in capital spending. Technological improvements and greater efficiency has helped U.S. shale producers pump out crude oil at lower margins – some say it is now profitable at less than $50 per barrel. Additionally, companies are finding easy access to credit and private-equity firms have bought out struggling companies, which have kept production flowing.
“We believe that the undersupply situation will happen much sooner than many people expect. In Q4 2017, we are already estimating a 2 million b/d deficit. This comes from a combination of our bearishness on non-OPEC supply and a more realistic look at global demand,” according to a Seeking Alpha analysis of oil markets.
While many oil market observers believe a rise to $60 per barrel is necessary to fan the flames of a broader rally, over the near term, the $50 per barrel is key.