Energy Stocks Bullish, But Futures Market Signals Trouble Ahead

Key Points

• The S&P 500 energy sector ETF traded higher for the fifth consecutive session on July 24.
• The oil futures market predicts a price decline by mid-2025, due to broad economic effects of interest-rate increases.
• Exxon Mobil and Chevron earnings reports may be catalysts for the sector's future movement.

The Energy Select Sector SPDR Fund NYSEARCA: XLE was trading higher for the fifth session in a row on July 24, extending that streak with a gap up at the open. 

However, some analysts are saying investors should use caution: Despite some very bullish current developments, the situation could change in the not-so-distant future. 

The uptick was spurred by oil prices rallying to their highest levels since late April, on news of increased domestic demand, tighter supplies, and growing optimism about China’s economic stimulus program.

The ProShares K 1 Free Crude Oil Strategy ETF BATS: OILK, which tracks performance of the Bloomberg Commodity Balanced WTI Crude Oil Index, is up 5.95% in the past month. 

Big Sector Components Fuel The Charge Higher

The largest components within the S&P oil sector are Exxon Mobil Corp. NYSE: XOM and Chevron Corp. NYSE: CVX, at 21.30% and 18.76%, respectively, of sector weighting.  

As you might surmise, those two stocks have led the sector’s upward trajectory, with both Exxon Mobil and Chevron gapping up at the open on July 24. Both stocks have posted four days in a row of gains.

The best percentage gainer in the past five days has been Valero Energy Corp. NYSE: VLO, which is up 8.38% during that time. 

Energy, as most investors are well aware, was one of only two sectors ending 2022 with a gain. In this case, the XLE ETF was up 64.17% for the year, while the only sector ETF to post a gain was the Utilities Select Sector SPDR Fund NYSEARCA: XLU, which eked out a return of 1.42%. 

Concern For Energy's Longer-Term Prospects

So why might there be cause for concern about the energy sector’s longer-term prospects, despite the recent bullish price moves?

If you take a look at the Energy Select Sector SPDR Fund chart, you can see that it’s traded in a fairly narrow range since it began consolidating in November. You can also see that so far, it’s found a floor above March lows between $75 and $76. Those lows coincided with a market selloff due to concerns about regional banks, which analysts feared could lead to a widespread recession. 

The current consolidation is also holding well above the low in the ETF’s base formed in the summer and fall of 2022, before it rallied to finish the year strong. 

These days, concerns about the oil industry are pegged to interest rates and China’s economy. 

Quarter-Point Rate Increase Priced In

The market has priced in a quarter-point rate hike from the Federal Reserve this week, and expects the same from the European Central Bank. That means investors will be listening closely to remarks from central bank officials, hoping to glean insights as to whether or not more increases may be ahead.
Higher rates would likely dampen economic growth, including demand for oil. But a pause in rates could have the opposite effect.

Meanwhile, oil demand from China has exceeded expectations, and Beijing has signaled it’s committed to more economic stimulus. Analysts believe the Chinese government wants to end the year with a strong economic growth rate. 

All of that indicates robust demand for oil in the near term, so what are some analysts worried about? 

Oil Price Decline By Mid-2025?

According to some reports, the oil futures market is forecasting a price decline by the middle of 2025, down to around $65 per barrel, due to ongoing effects of the Federal Reserve’s series of rate increases. 

Those forecasts are weighing on oil-and-gas stocks, which, as a group, continue to trade well below November 2022 highs. 

However, a catalyst for an upside price move could come from Exxon Mobil and Chevron earnings reports later this week. If demand, and especially forecasts, come in better than expected, investors could suddenly decide the futures traders were wrong. That could help the entire oil-and-gas industry go into rally mode.

Of course, the reverse is also true. Weakness could result in another selloff. That, in turn, could offer a buying opportunity for investors with more conviction in the sector, who want to snap up some shares at a more attractive valuation.