Energy ETFs Lag Broader Markets as Supply Risks Linger
XLE's recent rally hasn't been enough to equal broader ETFs like SPY this year.
While the recent rise in oil prices has been a boon for energy ETFs, they’re still lagging the broader market this year.
Since Sept. 11, the year-to-date gain for the Energy Select Sector SPDR Fund (XLE) has jumped from 0.6% to 8.3%, putting the ETF solidly in the green for 2024.
The $37 billion fund was boosted by a geopolitics-fueled rally in oil prices, which rose from less than $66 about a month ago to as high as $77 on Oct. 7. Today, a barrel of WTI crude oil fetches $72.
However, even after its recent rally, XLE’s gain sharply trails the annual return for the SPDR S&P 500 ETF Trust (SPY), which is up by almost 21% on a year-to-date basis.
XLE Lags only Real Estate ETF XLRE Among Sector ETFs
In fact, XLE is the second-worst-performing ETF within SPDR’s suite of 11 sector ETFs, ahead of only the 7.8% gain for the Real Estate Select Sector SPDR Fund (XLRE).
The relatively poor performance of energy stocks is simply a reflection of tepid oil prices. The recent modest bump in prices aside, oil has been relatively weak for much of this year.
Strong supply gains in the U.S. and elsewhere have been met by flagging demand, which has been weighed down by a struggling Chinese economy.
In its latest oil market report, the International Energy Agency wrote that “global oil demand growth continues to decelerate, with reported 1H24 gains of 800 kb/d y-o-y the lowest since 2020” due to “rapidly slowing China, where consumption contracted y-o-y for a fourth straight month in July, by 280 kb/d.”
At the same time, annual production gains are expected to “strengthen from 660 kb/d this year to 2.1 mb/d in 2025,” easily swamping expected demand growth of 950 kb/d in 2025.
Of course, geopolitical factors could shift the supply and demand balances. In recent days, speculation has grown that Israel could attack Iran’s oil facilities, potentially taking some oil supply off the market.
Iran is currently pumping around 3.4 million barrels per day of crude oil, according to IEA data. Any significant supply disruptions in that country could provide at least a short-term boost to oil, and by extension, XLE.