Over time, energy stocks tend to follow the price of oil quite closely. The price of oil has climbed from $20 a barrel five years ago to $97 a barrel today. Over the same time, one of the most popular Energy Exchange Traded Funds (XLE) has seen its price rise from roughly $20 per share to $77 per share.
Over shorter periods of time, the two measures can diverge, as they have done in recent months. Since May, the price of oil has increased over sixty percent while the energy ETF has failed to keep pace, rising slightly more than twenty percent.
If the long term correlation is to hold, this suggests one of two things is likely to occur. Either the price of a barrel of oil is due for a healthy correction or energy stocks are due for another leg up. On second thought, I guess they could also meet somewhere in the middle, with oil prices falling and oil stocks rising.
Even with the global demand argument intact, recent earnings reports from many energy companies would seem to suggest all is not as healthy as it once was. How clear is it that oil is a bit pricey here?
As clear as mud.