Oil Stocks are Winning…But Will Their Outperformance Last?

August has been a downer for stocks but if anyone can be called a winner this month it’s the energy sector, and more specifically oil stocks.

Associated Press

The Energy Select Sector SPDR ETF (XLE) has gained 1.5% to $82.34 today, by far the best performance of any sector in the S&P 500. It’s lost 0.1% in August, but that too counts as a victory when every other sector has lost between the Materials Select Sector SPDR ETF’s (XLB) 0.2% loss and the Consumer Staples Select Sector SPDR’s (XLP) 5% drop. The S&P 500 has fallen 2.9%.

Oil and energy stocks are among the best performing stocks in the S&P 500 this month as well. Pioneer Natural Resources (PXD), for instance, has gained 13% to $175.42 in August, while Chesapeake Energy (CHK) has jumped 13% to $26.36. Halliburton (HAL), meanwhile, has gained 8.7% to $49.07. All three are among the top-ten gainers in the S&P 500.

The energy sector is, of course, getting a boost from rising oil prices, which have been spurred higher by fears that the war in Syria would spread and disrupt production in the Middle East. WTI crude futures have gained d0.9% to $109.97 a barrel today, and 4.7% in August as the violence in Syria escalates. Can the rise continue? Raymond James analyst Pavel Molchanov’s not so sure:

We have seen this fear before – in 2003, and again in 2011. The historical parallels are not perfect, but they are close. In the run-up to the invasion of Iraq in 2003, oil prices were in a steady uptrend, as shown in the first chart on page two. Prices peaked a few days before the invasion began on March 20 and continued to slide thereafter. Sixty days after the invasion, prices were 23% lower than at the peak. A similar pattern can be seen in the case of the NATO intervention in Libya. While it's hard to isolate Libya from the broader turmoil of those early days of the Arab Spring, the second chart on page two shows the oil market's panic in February and March of 2011. After NATO airstrikes began on March 19, prices kept rising for another month but then rolled over sharply. After the sixty-day interval, prices were 14% lower than at the peak.

By my own accounting, the Energy Select Sector SPDR fell about 4.9% in the sixty trading days following the beginning of the airstrikes on Libya.