Energy ETFs Approaching All-Time Highs

Over the past months, the technology sector has dropped like a stone, and all the leading stock market indices have posted significant declines. Rising interest rates, a strong US dollar, inflation, supply chain bottlenecks, and other factors have caused the selling. 

Meanwhile, the traditional energy sector has gone the other way. The Energy Select SPDR Fund (XLE) moved to a new multi-year peak last week and is approaching a challenge of the 2008 all-time high. The XLE holds shares of the leading US traditional energy and energy-related companies. The rallies in crude oil and natural gas have created an earnings bonanza for the sector. US energy policy has made the entry barriers high, providing a virtual monopoly for the well-capitalized US energy giants.

Crude oil and natural gas rise to fourteen-year highs

Nearby NYMEX crude oil futures corrected from the early March $130.50 high, but they remained above the $120 per barrel level as of June 14. 

The chart highlights that WTI oil futures are sitting at the highest price since 2008. 

Nearby Brent crude oil futures on the Intercontinental Exchange reached a high of $139.13 in early March and were sitting near the $125 per barrel level on June 14.

Last week, NYMEX natural gas futures traded to the highest price since 2008 at $9.664 per MMBtu. Crude oil and natural gas prices have come a long way since the multi-year and all-time 2020 lows. 

While oil and gas have not reached all-time highs in 2022, oil products are a different story. 

Gasoline and distillates reach record peaks in 2022

Individual consumers do not purchase raw crude oil, but, directly and indirectly, buy oil products. Drivers fill their gasoline tanks at filling stations, purchasing gasoline. Shoppers purchase goods that arrive at the market by diesel-powered trucks, and travelers on airplanes are consuming jet fuel. These are just a few examples of the dependence on crude oil products.

In 2022, gasoline and distillate fuel prices have soared to record levels. 

The chart dating back to the 1980s highlights before 2022 that the all-time high in gasoline prices was in 2008 at $3.6310 per gallon wholesale. In June 2022, the price reached $4.3260 and was above the $4.10 level on June 14.

NYMEX heating oil futures serve as a proxy for other distillates, including diesel and jet fuels.  

The chart shows heating oil futures traded to a record peak in 2008 at $4.1586 per gallon wholesale. In 2022, the price moved through that level as a hot knife goes through butter, reaching $5.2217 per gallon in 

April. Heating oil futures were sitting above the $4.40 level on June 14. 

US Energy policy lit a bullish fuse- The war in Ukraine added fuel to the fire

President Joe Biden pledged to address climate change on the 2020 campaign trail, he followed through on those promises in 2021. Supporting alternative and renewable energy and inhibiting fossil fuel output caused production and investment in hydrocarbons to decline. As the shift in US energy policy created entry barriers for new oil, gas, and related businesses, it surrendered production and pricing control to the international oil cartel and Russia. 

Oil and natural gas prices were already moving higher when Russia invaded Ukraine and sanctions, and retaliation caused traditional energy prices to explode to fourteen-year highs. US energy policy supported fossil fuel prices as the world continues to run on oil and gas, but the war turbocharged the rallies. 

The XLE has exploded higher and has outperformed the four leading stock market indices in 2022

The US companies involved in exploration, production, refining, and related services in the oil and gas sector have experienced a profit bonanza in 2022. The top holdings of the Energy Select SPDR Fund (XLE) include:

The chart shows an over 43.40% exposure to XOM and CVX, the leading US integrated oil companies, but includes many other industry leaders. At $86.58 per share, the XLE ETF had over $40.368 billion in assets under management. The ETF trades an average of over 27.2 million shares daily and charges a 0.10% management fee. 

The chart shows that as of June 14, the XLE moved 55.5% higher in 2022 from the $55.50 level on December 31, 2021. The XLE has performed the three leading stock market indices in 2022:

• The NASDAQ Composite was down 30.6% as of June 14 in 2022.
• The S&P 500 corrected 21.3% from December 31, 2021, through June 14, 2022
• The DJIA fell 16.1% over the period

The XLE has been the place to be for equity investors in 2022. 

Approaching a record high in oil and the XLE

Energy commodities tend to take the stairs higher during rallies and an elevator to the downside when they correct. However, the war in Ukraine and US energy policy in 2022 have changed some of the historical trading patterns in the oil and gas markets. The companies that continue to produce fossil fuels are the beneficiaries of the higher prices and bullish trends. The entry barriers for competition only enhance the earnings. 

The chart shows the XLE traded to a high of $93.31 last week, and the upside target stands at the June 2014 $101.52 all-time high. The ETF that holds the leading US traditional energy companies and oil’s price could blow through their record peaks just as gasoline and distillate fuel prices have over the past weeks.