Bulls May Be Coming Back to Energy as Global Economy Reopens

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Energy stocks jumped yesterday as inventories tightened and traders looked for demand to increase.

The SPDR Energy ETF (XLE) rose 2.8 percent, its biggest one-day gain in six weeks. Crude oil futures also leaped almost 5 percent.

The Energy Department reported that crude-oil inventories declined by 5.9 million barrels last week, almost twice the drop forecast by analysts. (That’s bullish for price because it means there’s less supply available to users.) It was the third straight week that stockpiles were smaller than expected, breaking a string of five consecutive bearish readings.

The report was also noteworthy because inventories have returned to their lowest levels since the pandemic hammered the market March 2020.

Separately, two major industry groups made positive comments. On Tuesday, OPEC inched up its forecast for global oil demand. The International Energy Agency followed with a similar statement yesterday, adding that daily production may need to increase by 2 million barrels in the second half of 2021.

SPDR Energy ETF (XLE), daily chart, with 50-day moving average and other technical events.

Oil Price Consolidates

The news comes amid a two-month consolidation period for crude oil, which first rose above $60 in mid-February. It’s chopped on either side of that level since, but yesterday closed decisively above it. The bounce also occurred at the 50-day moving average — a potential sign the bullish trend remains intact.

Analysts have also hiked their earnings estimates for oil and gas companies. They started the first quarter projecting a 61 percent profit drop and revised it up to -15 percent, according to Factset. The research firm also noted that energy stocks trade at the steepest discount to Wall Street price targets.

In conclusion, energy remains the market’s top sector this year despite struggling in the last month. Price action yesterday and recent news suggests the bullish trend may be resuming. Investors looking for a straightforward way to play the economic recovery may return to the group as businesses reopen and travel resumes.

Crude oil futures (@CL), daily chart, with 50-day moving average.
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