Energy Select Sector Index ETF (XLE) analysis: what is happening with the price?

Oil and natural gas prices have risen, helping the XLE price to go higher

The XLE Energy Select Index is hitting an eight-month high in mid-February. Strong gains in oil have helped buoy the index. Natural gas prices have also increased. The gains in oil have been driven by stronger demand and lighter supply. With the vaccine rolling out in the United States and diesel and gasoline demand rising, production levels will need to accelerate to keep oil prices from rising above the 2020 highs. 

Seasonally, the XLE experiences negative performance in March. Over the past five years, the XLE has declined 50 per cent of the time for an average loss of 4 per cent. The technicals look positive but the XLE will need to clear key resistance to continue to trend higher.

What is the XLE?

The XLE is an exchange-traded fund (ETF) that holds several large energy corporations. It holds companies that focus on different areas of the energy sector. Most of the companies held are integrated energy companies that focus on upstream, downstream and midstream activities. Upstream is exploration and production. Downstream is refining, while mid-stream is the movement and storage of oil and oil products. Some of the companies focus solely on oil services such as making drilling rigs. The XLE provides investment results that correspond to the price and yield performance of publicly traded equity securities of companies in the Energy Select Sector Index. The index invests at least 95 per cent of its total assets in the securities comprising the index. 

Production is down

The reason many of the energy shares in the XLE are rising is the surge in crude oil prices. West Texas Intermediate (WTI) has increased from minus $1.44 in May to a high of $61.26 in February 2021. While demand for oil products is on the rise, production has yet to catch up. Production levels in February 2020 were more than 13 million barrels a day in the United States. They dropped to a low of 10 million barrels a day at the trough in 2020. The Energy Information Administration (EIA) estimates that US crude oil production averaged 11 million barrels a day in January, which is down slightly from 11.1 million barrels a day in November. EIA expects production will continue to decline slightly in the coming months, reaching 10.9 million barrels a day in June 2021. 

The EIA estimates that US crude oil production will average 11 million barrels a day in 2021, which is down from 11.3 million barrels a day in 2020 and 12.2 million barrels a day in 2019. The expectation is that oil production will rise to 11.5 million barrels a day in 2022.

Energy Select Sector Index ETF technical analysis

The XLE is rising but has run into resistance seen near the June 2020 highs at 46.88. Prices will need to close above this level for the upward rebound to continue to accelerate. Support is seen near the 10-week moving average at 41.40. Short-term momentum is positive as the fast stochastic generated a crossover buy signal. The current reading on the fast stochastic is 93, above the overbought trigger level of 80. Medium-term momentum is positive as the moving average convergence divergence (MACD) histogram is printing in positive territory with an upward sloping trajectory which points to higher prices.

Energy Select Sector SPDR Fund: how to trade

The upshot is that strong gains in crude oil have helped lift energy shares. Oil prices are likely to continue to rise as demand outpaces production. While the seasonals are negative, the technicals should provide a strong backdrop for the XLE if it can close above key resistance. Wait for the XLE to close above $47 and then for it to trend higher in March.

Trade Energy Select Sector SPDR Fund: XLE shares price

Energy Select Sector SPDR Fund
Daily change
55.88
Low: 55.76
High: 56.89

FURTHER READING: ETFs, explained
FURTHER READING: ETF vs index fund: which is better?

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