Energy stocks rebound after difficult January

Energy stocks have not had a great start to 2017, but a broadly supported fundamental outlook and strong investor inflows indicate a general resurgence in an already-strong rally.

Trader walking by data board
Source: Bloomberg

Reports of 90% compliance with the OPEC deal among major cartel producers have resulted in the sort of response one would normally expect from President Trump. ‘Fantastic’, ‘amazing’ and ‘a record’ have all been used to describe the compliance seen among major producers. This, and an oil price that has recovered strongly since the lows of 2016, is enough to encourage further optimism among major oil firms.

The US energy sector ETF, the Energy Select SPDR Fund (XLE), has already risen 46% since the lows of 2016, but so far in 2017 it is one of the worst-performing sectors. Nonetheless, the trend is still up, while on a fundamental basis the balance of demand vs supply looks a lot more healthy now than a year ago. Ruthless cost-cutting at the oil majors was a theme of 2016, and this meant their break-even price for crude is now much lower as well. It is important to remember the ETF halved in value from the 2014 peak to the 2016, so there is still plenty of ground that can be made up.

Year-to-date, the ETF has seen inflows of over $500 million, as investors pile back in following the price drop. This stands in contrast to broader ETFs such as the S&P 500 SPDR ETF (SPY), which has seen outflows of over $7 billion. This indicates that investors continue to shift funds into sectors that have endured pullbacks within the context of an existing uptrend.

The price bounced higher last week without touching the 200-day simple moving average (SMA), 7010. Momentum indicators have moved out of oversold levels, with the daily relative strength index just below the 50 mid-point. The stochastic momentum index has moved higher, and it is possible we will see a situation similar to August, September and early November, where substantial rallies took place. A first target would be the 50-day SMA at 7492, and then beyond this the December peak at 7850. 

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