The relationship between oil and energy stocks has diverged to a notable degree, and investors may wonder how to play the spread.
Just consider the way WTI crude and the S&P energy exchange-traded fund, the XLE, have traded so far this year. The XLE has sunk 5 percent year to date, while crude has gained 4 percent in the same time.
The two assets typically trade in tandem, but recently the departure between the commodity and the equities has grown more pronounced.
Since mid-2015, the XLE has traded at a premium to WTI crude in a range of $15 to $30; this trend was broken in November ahead of OPEC's production meeting.
I remain very upbeat on the broader stock market, and believe this is a rare opportunity to sell WTI oil and buy the XLE. With the spread currently at $6, I expect it to widen to $12.
What's behind the move?
The major catalyst for this pattern was the stock market correction earlier this month. While the and crude lost as much as 12 percent and 13 percent from January highs, respectively, both have recovered the majority of those losses.
Still, the XLE tumbled 18 percent at its lows earlier this month, and has only regained about 30 percent of those losses.
Another catalyst can be found in the surge in WTI oil due to tighter inventories corresponding with less flow through the Keystone pipeline from Canada. We are now entering a maintenance season for crude, this will lead to less demand and a build in inventories.
