Investors Piled Into Energy ETFs. The Next Move Could Be Harder.

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Oil and gas stocks are starting to attract the eye of more investors, as the prices of those commodities soar. Even more so, investors have been flocking to energy exchange-traded funds, and appear to be more bullish than they have been in years.

Citigroup analyst Scott Chronert called the increase in investment in energy ETFs “astounding” in a note released late on Wednesday. And it’s not just ETFs. Chronert says the options market shows “the most bullish aggregate energy positioning backdrop in years.”

The investment trend comes as the price of oil and gas has been hitting multiyear highs. Natural gas and U.S.-traded oil recently hit their highest levels since 2014.

For investors considering getting into energy ETFs, the bullish positioning is a mixed bag. It shows there is clear momentum behind the industry. But it also means that the buying pressure that helped lift the funds could peter out in the months ahead. If everyone is buying ETFs, it’s not clear who the incremental buyer will be. That could mean that the rally is “approaching later innings,” Chronert wrote. “Incremental gains, even against a support macro backdrop, won’t be as easy from the current bullish positioning setup,” he noted.

Chronert still thinks the ETFs could rise if oil and gas prices keep rising. In addition, energy has become a top play for people concerned about inflation, so if inflation worries escalate the ETFs could also rise. 

Citi did not specify which ETFs it analyzed, saying only that it included all kinds other than master limited partnerships (MLPs), a corporate structure often used by pipeline companies. There are several ETFs that track the energy sector and specific industries within it.

The Energy Select Sector SPDR Fund (ticker: XLE) takes a broad look at energy, as does the Vanguard Energy Index ETF (VDE). Both are largely made up of oil-and-gas companies.

The SPDR S&P Oil & Gas Exploration & Production (XOP) just tracks producers.

The VanEck Oil Services ETF (OIH) and the SPDR S&P Oil & Gas Equipment & Services ETF (XES) hold services companies like Schlumberger (SLB).

The VanEck Oil Refiners ETF (CRAK) holds refiners from around the world.

Write to Avi Salzman at avi.salzman@barrons.com