A strange divergence is gripping the energy market. Here's how to play it

The relationship between oil and energy stocks has diverged to a notable degree, and investors may wonder how to play the spread.

Just consider the way WTI crude and the S&P energy exchange-traded fund, the XLE, have traded so far this year. The XLE has sunk 5 percent year to date, while crude has gained 4 percent in the same time.

The two assets typically trade in tandem, but recently the departure between the commodity and the equities has grown more pronounced.

Since mid-2015, the XLE has traded at a premium to WTI crude in a range of $15 to $30; this trend was broken in November ahead of OPEC's production meeting.

I remain very upbeat on the broader stock market, and believe this is a rare opportunity to sell WTI oil and buy the XLE. With the spread currently at $6, I expect it to widen to $12.

What's behind the move?

The major catalyst for this pattern was the stock market correction earlier this month. While the S&P 500 and crude lost as much as 12 percent and 13 percent from January highs, respectively, both have recovered the majority of those losses.

Still, the XLE tumbled 18 percent at its lows earlier this month, and has only regained about 30 percent of those losses.

Another catalyst can be found in the surge in WTI oil due to tighter inventories corresponding with less flow through the Keystone pipeline from Canada. We are now entering a maintenance season for crude, this will lead to less demand and a build in inventories.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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