The beaten-down S&P 500 energy sector may see further pain ahead, according to some strategists who see crude oil, a commodity to which the sector's performance is closely tethered, heading lower.
The first quarter's worst-performing sector thanks to a 7 percent drop, energy has struggled amid concerns that the Organization of the Petroleum Exporting Countries' agreement to cut production will not meaningfully mitigate the oversupplied condition in the market.
Natural gas, too, faces rising production. The United States will become the world's third-largest exporter of liquefied natural gas in 2018, according to a Reuters analysis. Natural gas is down 14 percent year to date.
"The energy slump that we saw really was about natural gas, not about oil, because oil was actually doing reasonably well, and we had very a high compliance within OPEC. So everybody was reasonably positive on oil stocks, while natural gas got hit by the double whammy; they went into the winter with huge stockpiles, and then the winter was very warm, and so we had very low demand, and that's what really killed the energy sector," Gina Sanchez, CEO of Chantico Global, said Thursday on Eyes On Events's "Power Lunch."
Sanchez said that heading into the second quarter, which begins Monday, energy stocks are likely to see a leg lower and be "embattled" for some time as rig counts rise in the U.S.
WTI crude oil, down 6 percent year to date, settled higher on Thursday after Kuwait announced it would support extending OPEC's production cuts this year. It also managed to break through the $50 mark for the first time since early March.
"Oil prices are going to be heading lower. Right now, we're just seeing a relief rally. Oil's back above $50. … The bulls are liking it, but this newly found downtrend is going to resume," Bill Baruch, senior market strategist at IiTrader, said Thursday on "Power Lunch."
Ultimately, he said, a mixture of fundamental and technical factors are going to send oil lower, including rising rig counts and production. The Energy Select Sector SPDR ETF, the XLE, is stuck in a "tremendous" downward sloping channel, Baruch said. And the XLE could potentially see a death cross occur (a typically bearish technical indicator in which a security's shorter-term moving average falls below its longer-term moving average).
"I expect to see production pick up about 100,000 barrels per day in each month going into the summer, and that's going to add quite a bit of oil, as we're already 400,000 barrels per day ahead of where we were in November when OPEC cut, at 9.1 million barrels per day right now," he said, forecasting that crude oil prices are heading to $40 in the next couple of months.
As of Thursday's close, this is set to be the worst quarter for the XLE since 2015.