Looking at the price of oil, many investors may be inclined to think oil stocks are doing well. Many are. However, for investors in the Energy Select Sector SPDR Fund (NYSEARCA:XLE), it’s been a rather rough go. Today, the XLE ETF is down approximately 5% in afternoon trading, having dropped nearly 7% at today’s lows.
This move may certainly come as a surprise for investors. With oil prices this high, most producers and energy-related stocks are seeing cash flows they haven’t seen in more than a decade. This is true.
However, a range of headwinds have combined to make energy stocks look less attractive right now.
Chief among the concerns energy investors have is the potential impact of soaring interest rates. Recession concerns have now come into focus, as many project this will be the future of the U.S. market amid higher rates. With a recession comes lower demand, and therefore lower future prices on oil. While good for consumers, that’s not necessarily good for companies.
Accordingly, many oil and gas companies have already begun to cut back on production in advance of weakening global demand. Such moves have drawn the ire of President Joe Biden who, to be fair, has never been a friend of the traditional energy sector.
Additionally, an impressively strong U.S. dollar has done its part on weakening the near-term outlook for all commodities. Given the fact that oil is priced in U.S. dollars in most major markets globally, a stronger dollar means less purchasing power for international buyers for oil.
Let’s dive into what investors may want to make of this environment.
Is the XLE ETF Worth a Buy Right Now?
Despite impressive cash flow growth and capital redistribution to shareholders, energy investors have reason to be worried. Indeed, the XLE ETF is among the most-watched exchange traded funds in the market right now for this reason.
Sure, the pushback against energy investing is likely to continue. Oil and gas stocks are involved in the production of fossil fuels. These ultimately drive higher greenhouse gas emissions and are not in the best interests of environmentalists and green agendas globally. Plus, Biden has made his stance on the sector clear for some time.
That said, it’s worth noting energy companies were generally left for dead during the pandemic. Many went bankrupt or were forced to restructure, leading investors to look elsewhere. This sector became perhaps impossible for many people to invest in prior to the recent surge in energy prices.
Since then, shareholders have been able to claw back some losses, and companies have been able to pay down debt and be in a better position to weather the next recession. That’s a good thing for energy security moving forward.
Given what’s going on with the current global geopolitical situation, that should be viewed as a major positive for the U.S. economy. It’s not, but that’s okay. And until energy security becomes as important as the country’s worthy long-term carbon emissions goals, related companies included in the XLE ETF will remain the villains many won’t invest in.
The market appears to be taking the view that the positive sentiment this ETF has garnered is likely over. While unfortunate, that’s the environment we’re in.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
