Since mid-August, the Energy Select Sector SPDR ETF (NYSEARCA: XLE), which contains the largest energy companies in the S&P 500, has risen more than 10%. The S&P Oil & Gas Exploration & Production SPDR ETF (NYSEARCA: XOP), more representative of the small-cap drillers, has rallied 18%. 

There have been several head fakes during this energy bear market that started in the second half of 2014, but this time it feels different. 

Previous rallies fizzled because the fundamentals weren’t yet indicating a balanced market. That has now changed. 

The International Energy Agency’s (IEA) most recent Oil Market Report notes that global oil demand grew by 2.3 million barrels per day (BPD) year-over-year (YOY) in Q2, which was a stronger-than-expected pace. The IEA revised the 2017 growth estimate for 2017 upward to 1.6 million BPD. Demand growth has been unexpectedly high in Europe and the U.S., driven by low oil prices.

But it’s on the supply side where things have gotten interesting.

In August, oil production fell in both OPEC and non-OPEC countries. Global oil supplies in August dropped by 720,000 BPD, with most of the decline coming from non-OPEC countries. OPEC also experienced a production decline for the first time in five months, as supply fell by 210,000 BPD.

Strong demand growth and declining supplies are finally having the desired impact on high global crude oil inventories — which have been the single biggest factor behind the bear market in the energy sector. The huge surplus has been falling steadily for months and is on a trajectory to soon reach the five-year average inventory level.

Citigroup is now warning that OPEC may be pumping at maximum capacity and that there is a risk of a market squeeze next year. That scenario is not reflected in current crude oil prices.

Nor is the much scarier scenario that commodities trading house Trafigura postulated — “Global oil demand may be between 2 million to 4 million barrels per day more than worldwide crude supply by the end of 2019.”

The last time we saw that kind of gap between supply and demand, it drove global oil prices above $100 a barrel, and it sent the share prices of oil producers much higher along with it.

The companies in The Energy Strategist portfolio have bounced higher along with oil prices. Since August 21, two dozen portfolio holdings have risen by double digits. 

Only four portfolio companies registered a negative return since August 21, and three of those were coal producers that don’t stand to benefit from higher oil prices. 

In October, I plan to review the entire portfolio, but today I want to show which holdings have performed best during the current rally. The strongest gains were unsurprisingly from the beaten down oilfield services companies and the drillers. Here are the Top 10 performers:  

• 5-week return covers the period from August 21 through September 28, 2017
• Share price is the closing price on September 28, 2017   

RPC, Inc. (NYSE: RES) provides a range of oilfield services to independent oil and gas companies. It has been the top performer during this rally with a return of 36.1%.

Hydraulic fracturing sand provider Smart Sand Inc (NASDAQ: SND) has been a big disappointment since being added to the portfolio, even though its underlying fundamentals have remained strong. Its 32% return over the past five weeks will help dig it out of the deep hole it fell into. 

Half the list is made up of beaten down oil and gas producers that I don’t feel were getting enough credit for the positive moves they have been making. 

Valero (NYSE: VLO) was only added to the portfolio on August 21st, but it quickly raced past its Buy limit. That is also the case with RPC, and ConocoPhillips (NYSE: COP) closed at exactly its Buy limit.

Despite the rally, most of the companies on the list remain in negative territory for the year. That means you can still buy them cheaper than you could at the beginning of the year, even though the outlook is much improved. 

Over the next month, I will drill down into the portfolio, highlighting which companies will likely continue to benefit from an ongoing rally, and which are candidates for pruning.