US Sector Forecast – Energy Shares Move higher Following Rising Crude Oil Prices

The energy sector is up more than 7% during the first week of February, buoyed by rising oil prices. While US inventories remain stable, product demand has narrowed year over year. In late March, when there is a year over year compared to the beginning of the pandemic, traders will have a better gauge of the recent uptick in energy demand. According to the US Department of Energy, total product demand, which includes items like heating oil, diesel fuel, and gasoline, is only down 4.3% year over year. Technically, the energy sector ETF that follows both producers,  integrated firms like Exxon Mobile and BP and services companies is breaking higher and likely to test the January highs.

Demand is On the Rise

While demand is down year over year, the recent increase in activity around the US has led to an uptick relative to the past six months. According to the Energy Information Administration, total products demand over the past month averaged 19.4 million barrels a day, down by 4.3% from the same period last year. Over the past four weeks, gasoline demand averaged 7.8 million barrels a day, down by 10.6% from the same period last year. Distillate fuel demand averaged 4.0 million barrels a day over the past four weeks, up by 1.5% from the same period last year. This uptick in demand is the first time that distillates, including heating oil and diesel fuel have been higher year over year. Jet fuel product supplied was down 31.2% compared with the same four-week period last year.

Technical Analysis

The energy sector index (SIXE)  broke out above a downward sloping trend line and is poised to test higher levels. Support is seen near the breakout level, which coincides with the 10-day moving average at 427. Resistance is seen near the January highs at 472. The close near the highs of the session on Thursday is a positive sign for the SIXE. Short-term momentum is positive as the fast stochastic generated a crossover buy signal in oversold territory. The current reading on the fast stochastic is 40, up from 13, which reflects accelerating positive momentum.

Medium-term momentum is also positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 5-day moving average minus the 13-day moving average) crosses above the MACD signal line (the 6-day moving average of the MACD line). The MACD histogram also generated a crossover buy signal as it sliced through the zero-index level. The MACD histogram is printing in positive territory with an upward sloping trajectory, which points to higher prices.

The Bottom Line

The upshot is that energy producers are gaining trajectory as oil prices rise. Demand is beginning to accelerate as the sentiment that a vaccine will provide some normalcy sets in. Technically, the SIXE is breaking higher, pushing above trend line resistance as momentum turns positive. Look for the index to test the January highs and potentially break out to fresh 12-month highs.