Energy Prices Have Surged But the Sector Might be in for a Correction

Morgan Stanley drilled into the energy sector with a note Monday that lowered price targets on many energy names. This dragged the XLE energy ETF down almost 1 percent on a day when geopolitical tensions increased as President Donald Trump imposed new sanctions on Iran, one of the world’s key oil producers.

The energy sector has seen an 8 percent rally in June, with the XLE up 10 percent year to date after falling from its year to date highs in April.

West Texas Intermediate graph

WallachBeth’s Andrew McOrmond said Monday on CNBC’s “ETF Edge” that the fundamentals are looking a little too slick for energy names. He points out that the XOP, the oil and gas exploration ETF, has actually seen a bigger gap with oil in the last few days than normal.

“In last five days, [the XOP] has gapped at a 6 percent spread from oil, and traditionally that’s 1 percent,” he said. “I think that’s been dragging down these ETFs.”

Since 2007, energy stock’s weighting in the S&P 500 dropped from 15 percent of the index’s stocks to just 5 percent today. DataTrek’s Nick Colas says given the outlook for oil and energy stocks, that’s the exactly how investors should be weighing the sector in their portfolios.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza