Economics 101’s theory of supply and demand defines the relationship between buyers and sellers. Last week we witnessed West Texas Intermediate oil futures contract trade at a mind boggling price of -$38/barrel – too much supply and not enough demand. The fear that drove prices lower is a lack of storage for domestic oil production. Given oil’s bizarre price action it would be reasonable to assume the energy sector would also see lower prices too, but just the inverse is happening. Since the S&P 500 (symbol: SPX) recent low on March 23rd through last Friday, the SPDR Energy Sector ETF (symbol: XLE) is the best performing sector.
Why the outperformance? Perhaps investors are forward looking and calculating an energy dependent World will eventually reopen, oil production will be cut, and ongoing support from the U.S. government. The outperformance doesn’t mean the sector is in the clear, oil’s price will likely remain volatile and companies with weaker balance sheets may seek bankruptcy protection, but at least this is a start.
Chart Source: StockCharts.com