Energy is one of just three sectors in the green over the past month as oil clings to its recent rally, and some see the upside continuing.
“But things actually finally look different,” he continued. “There’s strong global growth, there’s good supply-demand fundamentals, and that’s really kept a solid floor under oil prices, which right now are right around three-year highs.”
Crude oil recaptured a level above $60 in late December for the first time since 2015. Oil began to claw its way back from lows through 2016 as global oil producers, including the Organization of Petroleum Exporting Countries, made efforts to address a supply-demand imbalance.
Yet, even as crude prices have surged and held above $60, the energy sector is still sluggish.
“The most surprising part of this rally in oil prices is that energy stocks haven’t done anything,” said Tepper. “They’ve lagged, which means there’s significant upside potential.”
The price of crude oil has rallied nearly 23 percent over the last 12 months. Over that same period, the XLE Energy SPDR ETF has dropped 3 percent.
“With pricing power being the strongest that we’ve seen it in really this decade, and margins are continuing to expand, we really, really like the energy sector. Eventually stock prices are going to have to catch up,” said Tepper.
Boris Schlossberg, managing director of FX strategy at BK Asset Management, also sees strong fundamentals underpinning a potential rally in the sector.
“The macro background is very positive. Every single region in the world is growing, and I think that’s the main reason why energy is doing well, because demand is really firm,” Schlossberg told “Trading Nation” on Thursday.
Global demand for oil is expected to rise by 1.5 million barrels per day in 2018, according to the International Energy Agency. The oil watchdog increased its full-year estimates in March.
“At this point, with very strong yields and the fact they were so cheap for so long, the market is really just plowing on a mean reversion basis,” said Schlossberg. “It’s still a very good bet. It’s basically a story of buy for the yield and stay for the possible capital gains.”
Mean reversion refers to the trading theory that prices and returns tend to move back to their historical average. The XLE ETF plunged below its 200-day moving average in early February during the broader market sell-offs. The ETF has straddled that support level through March and early April.
The energy sector was lower on Friday along with the rest of the market.