The main exchange-traded fund holding oil stocks is up more than threefold from the low it hit early in the pandemic. Don’t expect to ride it higher.
The
Energy Select Sector SPDR Fund
(ticker: XLE) has risen to $84 from about $25 in March 2020, mainly because the Federal Reserve lowered interest rates and the federal government pumped trillions of stimulus dollars into the economy as lockdowns derailed growth. The wars in Ukraine and between Hamas and Israel have added additional fuel to the gains, either by limiting the supply of oil on international markets or raising concern that less will be available.
West Texas Intermediate crude is now at about $78 a barrel, up from negative territory in April 2020. But
WTI,
and oil stocks, just can’t seem to surpass certain levels.
The oil equity fund topped out at about $93 last year. It appeared likely to move above that point several times since then, only for sellers to come in and knock the price lower. Oil, meanwhile, topped out at just over $100 a barrel last year.
Both of those levels are so-called long-term resistance, or points at which sellers have come in for more than 10 years now. Worse news in the Middle East or better-than-expected economic demand could send oil prices and stocks up toward those resistance levels, but it would take a significant surprise on either front to send prices above them.
That is why oil as an investment is looking more risky than rewarding right now. The risks is especially acute because central banks and governments around the world have changed their tune since the pandemic.
Fighting inflation is now the economic priority, so central banks around the world have lifted interest rates many times since the start of 2022 to reduce demand for goods and services. Higher rates usually hurt the economy with a delay, so economies may well slow down, with negative effects for the price of oil. That would hold back profits for oil producers.
For stock investors, the point is that “the energy sector will work lower and not break out to a new high,” wrote John Roque, head of technical strategy at 22V Research, noting that the S&P 500 energy sector is trading near the high end of its long-term range.
Write to Jacob Sonenshine at [email protected]
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