Since the middle of August the S&P 500 energy sector is up 11.5% compared to just 3% for the index as a whole. Many observers have chalked this outperformance up as a reaction to a deep oversold condition or a short covering bounce, but a growing amount of evidence suggests it may be more than that. First, it should be noted that purely from a performance perspective energy has been outperforming since mid-June, just not US energy companies. Since June 21st, DM Asia energy has outperformed global stocks by 14%, DM Europe energy has outperformed by 8.7% and EM energy has outperformed by 8.3%. As we will see below, there are fundamental reasons that suggest the rotation into energy may be structural in nature.

From a supply side perspective, US inventories of petroleum products peaked in mid-2016 and have been falling since then, as has the days supply of oil.

Falling inventory levels are positive for the price of the commodity. WTI crude has rallied from $43 to $52 as the trend in inventories has reversed.