Energy Sector Dip Presents a Compelling Buying Opportunity

May 29, 2024 at 07:45 AM EDT

Exxon Mobil logo displayed on a smartphone screen

The energy sector has experienced notable activity this year, with a significant rise in crude oil prices, up 13.33% YTD, and firm performance among major energy stocks. Despite a recent pullback, the sector's current dynamics suggest a favorable risk-reward scenario for investors seeking exposure. The Energy Select Sector SPDR Fund (NYSE: XLE), a prominent energy sector exchange-traded fund (ETF), is up 10.05% year-to-date, even after a nearly 7% decline from its 52-week high.

This recent dip may present a prime buying opportunity as the sector consolidates bullishly, well above its rising 200-day Simple Moving Average (SMA). Let's explore the current state of the energy sector and its top holdings to understand why now might be an excellent time to consider going long.

Energy Select Sector ETF: Bullish Breakout Potential

The XLE aims to mirror the performance of the Energy Select Sector Index, which includes companies involved in oil, gas, consumable fuels, and energy equipment and services. Despite the recent pullback, XLE remains at 10.05% year-to-date and is consolidating bullishly from a technical perspective.

Earlier this year, XLE broke above a multi-year resistance level near $94, signaling a significant trend shift and higher timeframe breakout. This move was supported by rising geopolitical tensions, particularly in the Middle East. Currently, the ETF is trading well above its rising 200-day SMA. A break above the $95-$96 range could trigger a technical breakout from its consolidation phase, potentially leading to a higher leg within the uptrend.

Understanding the positions of heavyweight stocks within the ETF, such as Exxon Mobil and Occidental Petroleum, a favorite of legendary investor Warren Buffett, can provide additional insights into the sector's overall momentum.

Exxon Mobil: Key Influencer of XLE ETF with Strong Growth Potential

Exxon Mobil (NYSE: XOM), the largest holding in the XLE ETF with a 26.76% weighting, is critical in influencing the ETF's performance. XOM is the world's second-largest oil refiner and boasts a market capitalization of nearly half a trillion dollars. With a P/E ratio of 14 and a dividend yield of 3.33%, XOM is a significant player in the energy sector, trading at a value-attractive valuation.

Exxon Mobil has outperformed year-to-date, with its stock up over 14%. The stock recently broke above a major resistance level at $120, indicating strong upward momentum, before pulling back and forming a bullish cup-and-handle pattern. If XOM can continue to consolidate in its bullish formation, it could easily offer an attractive long entry before pushing to new 52-week highs.

Based on 18 analyst ratings, the stock has a consensus rating of moderate buy and an impressive forecasted upside of nearly 18%. Most recently, analysts at Morgan Stanley reiterated their overweight rating on the stock and their price target of $145, which predicts over 23% upside.

Occidental Petroleum: Critical XLE Stock with Significant Breakout Prospects

Occidental Petroleum (NYSE: OXY) is another crucial energy sector stock favored by notable investor Warren Buffett. Buffett's company, Berkshire Hathaway, holds a substantial stake in OXY, underscoring its importance. OXY has performed modestly this year, up close to 4% year-to-date.

Occidental is a global oil and gas company operating in the US, the Middle East, Africa, and Colombia. Following its acquisition of Anadarko Petroleum in 2019, OXY became the US's sixth-largest oil and gas producer by market cap. The company has a $54.98 billion market capitalization, P/E of 16.94, and a dividend yield of 1.42%. OXY is the twelfth largest holding of the XLE ETF, weighing 2.52%.

Technically, the stock has been consolidating for several years, with $70 as a critical resistance level. A breakout above this level could signal a higher timeframe uptrend, making it a stock to watch closely. Although the stock is over 13% away from its 52-week highs and breakout confirmation level, a move over $70 would signal a much higher timeframe and significant breakout.

The Bottom Line: Prime Buying Opportunity in Bullish XLE ETF

The energy sector's recent pullback offers a potentially attractive buying opportunity from a risk-reward perspective. The XLE ETF, up 10.05% year-to-date, is consolidating bullishly above its rising 200-day SMA. A break above the $95-$96 range could signal a technical breakout and further upside.

Key stocks like Exxon Mobil and Occidental Petroleum are pivotal in driving the sector's overall momentum. Exxon recently broke above significant resistance before pulling back, and Occidental possesses a growth opportunity with 26.99% projected earnings growth for the entire year. These stocks provide valuable insights into the sector's potential direction. Investors should closely monitor these heavyweights as they consider gaining exposure to the energy sector amid its consolidation phase.

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Energy Sector Dip Presents a Compelling Buying Opportunity

Energy Select Sector ETF: Bullish Breakout Potential

Exxon Mobil: Key Influencer of XLE ETF with Strong Growth Potential

Occidental Petroleum: Critical XLE Stock with Significant Breakout Prospects

The Bottom Line: Prime Buying Opportunity in Bullish XLE ETF

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