Talk about a change of fortune. After being the top-performing sector last year, energy is the worst-performing sector so far in 2017―and it isn't even close.
The $15.7 billion Energy Select Sector SPDR Fund (XLE), the largest ETF tracking the sector, is down 14% year-to-date.
That's double the loss of the next-worst-performing sector―telecom―and well behind the more than 8% gain for the broader S&P 500 in the same period.
It's increasingly clear that the rebound in energy that many expected in 2017 is unlikely to come to fruition, for a number of reasons.
US Output At 2-Year High
The most obvious factor weighing on the energy sector is the surge in U.S. oil production. Since the start of 2017, crude oil production in the country climbed more than 6%, or 500,000 barrels, to 9.3 million barrels per day―a two-year high.
US Crude Oil Production
What those figures suggest is that not only can U.S. oil producers weather sub-$50 oil prices, they can thrive with them thanks to advances in technology and lower costs. The International Energy Agency (IEA) anticipates that production at the end of 2017 will be 920,000 barrels per day higher than at the end of 2016, and that it will grow another 780,000 barrels per day by the end of next year.
These are the types of growth rates witnessed when oil prices were above $100 a few years ago, and not something many would have anticipated in today's much lower oil price environment.
Of course, rapidly expanding output is great for U.S. oil producers at an individual company level. But when everyone is growing their production by leaps and bounds, it's naturally going to drag oil prices down, hurting the whole sector.
That's exactly what's happened as WTI crude oil futures sagged by 17.7% year-to-date and the front-month tracking United States Oil Fund (USO) dropped by 22.4%.