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Energy stocks have rallied since November, but signs of exhaustion could be appearing.
The SPDR Energy ETF (XLE) fell more than 3 percent today and is the market’s worst-performing sector fund in the last two weeks. The selling comes despite crude oil prices hitting a new 52-week high earlier today.
Traders are focused on gridlock between Saudi Arabia and the United Arab Emirates. The two Middle East states have failed to agree on gradually returning crude oil to the market. While that news should be a positive for energy in the short-term, the bigger fear is that OPEC will lose its cohesion. If that happens, producers could reopen the spigots and the world could be awash in excess oil again.
Today’s drop in energy stocks comes despite several weeks of lower-than-expected domestic inventories. However, U.S. drilling has come roaring back lately as OPEC and Russia cut production to support prices. For example, the weekly Baker Hughes Rig Count hit 475 on July 2, the highest reading since travel restrictions slashed energy demand in April 2020.
There are also some potentially bearish patterns on the charts of crude oil and energy stocks.
First, crude oil futures made a higher high today and a lower low than Monday. That’s a bearish “outside” candle, which may signal a trend reversal.
Second, XLE is hitting a resistance level around $55 that runs all the way back to 2016.
Third, XLE is below its 50-day moving average for the first time in 2-1/2 months. Its 8-day exponential moving average is also dipping below its 21-day exponential moving average — a potential indication of shorter-term momentum turning bearish.
One implication for today’s price action seems bearish for oil and energy. No increase in OPEC’s production should be bullish, but instead traders are “selling the news.” That suggests most of the positives (a disciplined and united OPEC) are fading, while the longer-term negative (oversupply) is returning.
A second takeaway could impact the overall economy: Lower oil prices mean lower inflation, potentially relieving pressure for the Federal Reserve to aggressively hike interest rates. That could be good news for the broader stock market, especially technology and growth stocks that benefit from lower interest rates.
In conclusion, energy stocks have languished for years as the world grapples with an oil glut. Things improved during the pandemic because OPEC removed almost 10 million barrels of daily production. But the market seems to think all the good news is priced in as things return to normal. Traders may soon look for energy’s longer-term bearishness to return.
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