Energy Sector Erupts Higher, But ...

Today, we saw the Energy Select SPDR erupt to an all-time high.  This shows that the XLE chart I posted on August 26, in a post titled "Energy Sector Breakout", seems to be working out. And we should be on the way to my August 26 target of $102.

But (don't you hate it when there's a but?) look at today's chart ...

(Updated chart)

Sure, the XLE broke out to a new high today. Then it promptly reversed.
Also, on the bottom of the chart is a momentum indicator called RSI.  The high in RSI is not as high as its previous high.  So, it is not confirming the breakout. 

In other words, we may have some more work to do for this thing to really take off. It may even be a false breakout, but that remains to be seen.

Recent Drivers of Oil and Oil Industry Stocks

It seems the range in WTI crude has moved higher, perhaps to $105-$110 from the previous $103-$108. 

So, I’d look to be a buyer of crude or energy on a dip to $105, or the bottom of the range.

But what has driven oil into a higher range? Forces include ...

Oil Outages in Libya. I've written about this before, and it continues to get worse. Libya’s supply fell to 550,000 barrels a day in August from 1 million barrels in July, and are running as low as 150,000 barrels a day in September. In the latest twist, Libya’s state-run National Oil Corp. declared force majeure on crude and refined product exports from four ports. Force majeure translates as "tough titties."

Forecasts for Increased Global Demand. The IEA upped its forecast for 2014 global oil demand growth by 70,000 barrels, citing an improving world economy. It projected global oil demand to reach 92 million barrels a day in 2014, up 100,000 barrels, or 1.2%, from 90.9 million barrels a day this year. 

Potential Bearish Forces

But there are potentially bearish forces you need to be aware of.

US Oil Output Is Booming.  Fracking helped pushed crude output up by 124,000 barrels, or 1.6%, to 7.745 million barrels per day (bpd) in the seven days ended Sept. 6, the Energy Information Administration said today. That's the highest level since 1989, Bloomberg reports.

(Source)

America’s shale energy revolution continues to be one of the strongest reasons to be optimistic about the US economy, especially because it might keep a lid on domestic energy prices.

You want another amazing fact: The state of Texas is now producing more oil than Iran. I expect the Texans will enjoy bragging about that.

The U.S. met 87% of its own energy needs in the first five months of 2013, on pace to be the highest annual rate since 1986, EIA data show. Domestic crude output will average 7.5 million bpd in 2013 and 8.4 million in 2014.

Oil Products Demand Is Sluggish in China. This is a red flag for me. Platts reports that  China's apparent oil demand growth in the first seven months of the year rose 4.2% year on year to average 9.86 million bpd. HOWEVER, many experts expected it to be higher, considering that China is known to be stockpiling oil.

Sinopec, the larger refiner with installed crude distillation capacity of 5.24 million b/d last year, saw its first half refinery throughput rise 5.2% year on year to 4.69 million b/d this year. But prices for gasoline and other major oil products actually went down.

Bernstein Research said Sinopec's downstream segments continued to be "negatively impacted by the weak economic environment in China."

So is that a one-off or the start of an ugly trend? Stay tuned.

In any case, the big trend for oil prices still seems higher, and I still have a $120 target on the XLE. But considering today's action, we may see a pullback before things really take off.  I might see such a pullback as a buying opportunity. This is not an official recommendation -- do what you think is best for your own investments.