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Energy Sector Earns An Upgrade

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Energy Sector Earns An Upgrade
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The energy sector has been on a tear in the second quarter. The Energy Select Sector SPDR (NYSE: XLE), the largest energy exchange-traded fund by assets, is higher by 17 percent so far in the quarter while the S&P 500 is about 5.3 percent.

Oil's move to multi-year highs and the resurgence of the energy patch, the seventh-largest sector allocation in the S&P 500, has some analysts turning bullish on energy names. CFRA Research recently upgraded energy to Overweight from Market Weight.

What Happened

“Lindsey Bell, an investment strategist with CFRA, explained the energy sector upgrade to overweight, from marketweight, as based on the expectations that oil prices will move higher into 2019 on increasing supply constraints in Iran, Venezuela, and likely the U.S. Permian Basin,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Tuesday.

Iran and Venezuela are both members of the Organization of Petroleum Exporting Countries. While Venezuela is home to some of the largest oil reserves in the world, the country's output has been plummeting due to lack of investment in energy infrastructure and mismangement by the government.

Why It's Important

The $19.26 billion XLE follows the Energy Select Sector Index and holds 31 stocks. The ETF is dominated by Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX). The two largest U.S. oil companies combine for over 39.5 percent of XLE's weight.

CFRA has Buy or Strong Buy ratings on 31 energy stocks, including XLE top 10 holdings such as Chevron and ConocoPhillips (NYSE: COP).

What's Next

“Bell added that President Trump's decision to exit the Iran deal will lead to sanctions on Iran, which is OPEC's third largest supplier of oil, averaging 3.8 million barrels per day (mmb/d),” said Rosenbluth. “CFRA expects Iran's output to be realistically reduced by about 300,000 b/d. CFRA's equity analytical team thinks investing opportunities are found in not only upstream E&P companies, but also downstream refiners as the spread between WTI and Brent prices widen.”

CFRA rates XLE Overweight.

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