The recent spike in oil prices not only gave the energy sector the boost it badly needed, but also had a significant positive impact on the broader markets. After dipping to levels not seen in over 10 years in the first half of February, both WTI and Brent crude have now surged over 40%. While WTI crude hit its highest settlement since Dec 24 on Monday, Brent crude registered the same since Dec 4. Banking on this impressive rally, the broader energy index – Energy Select Sector SPDR (XLE - ETF report) – saw the fifth straight session of gains for the first time since Oct 2015.

Most of the benchmarks made up for a large part of their losses on this rebound. Even energy mutual funds felt the same positive vibes after enduring a rough patch for over a year. All the energy equity mutual funds tracked by Morningstar finished in the green in the trailing one-month period.

So, investors interested in deriving significant returns from the ongoing crude rally may consider adding mutual funds from this space to their portfolio.

Before we suggest the mutual funds that one should invest in now, let's take a look at the driving factors:

Possibility of a Production Cut

Rising possibilities of a freeze on crude production following comments from the major oil producers was one of the main catalysts to the oil price rebound. The United Arab Emirates’ energy minister Suhail bin Mohammedal-Mazrouei said on Monday that “it doesn’t make any sense for anyone to increase the production with the current prices.” While talking about price control, he said: “We need to be patient. It’s not happening in weeks or months. Correcting to a sustainable price will take time.” Also, Ecuador's Foreign Minister Guillaume Long said that a meeting will be hosted by the country on Friday in Quito with Venezuela, Ecuador, Mexico and Colombia, "to reach [a] consensus over oil, especially prices."

Additionally, the U.S. Energy Information Administration (EIA) reported that total crude production for the week ending Feb 26 declined by 25,000 to 9.077 million barrels per day (bpd) and gasoline output decreased by 674,000 bpd to nearly 9.3 million bpd. Moreover, the EIA projected that oil production in seven major shale-drilling regions in the U.S. is expected to decline for the sixth straight month in April. Also, the EIA expects production to decline by 106,000 bpd to 4.87 million bpd in April from March. Also, the Organization of Petroleum Exporting Countries or OPEC reportedly lowered output by 79,000 barrels to 33.06 million bpd in February.

Declining Rig Count & Encouraging Economic Data

A continued decline in the oil rig count also helped oil prices to enjoy gains in recent times. Last Friday, Baker Hughes (BHI - Analyst Report) reported that the week’s total number of U.S. oil rigs decreased by eight to 392 – its lowest level since 2009. Active U.S. oil-drilling rigs dropped for the eleventh straight week. Moreover, the combined natural gas and oil rig count declined from 502 to 489 last week, slightly higher than the record low of 488 rigs in 1999. The company also said that the worldwide total natural gas and oil rig count declined from 1,891 to 1,761 in February, its lowest settlement since 2002.

Separately, recently released economic data indicated the U.S. economy is back on track to witness a significant recovery, which should perk up oil demand in the near future. According to the Bureau of Labor Statistics, the economy generated 242,000 jobs in February, considerably higher than January’s upwardly revised job number of 172,000. While the unemployment rate in February remained unchanged at 4.9%, the U-6 rate that includes the unemployed, the underemployed and the discouraged dipped from 9.9% in January to 9.7% in February – its lowest level since May 2008.

Also, the upward revision of fourth-quarter GDP growth rate pointed to improving conditions in the economy. As per the “second” estimate by the Bureau of Economic Analysis, the fourth-quarter output of goods and services increased at an annual rate of 1%, which was revised up from the previously estimated 0.7% rise. Moreover, in January, personal consumption reached the highest level seen in the last eight months. Income scaled up for the tenth consecutive time and was the highest since Jun 2015. Personal spending rose 0.5%, marking the highest increase since Jun 2015. Better-than-expected industrial production and an improvement in the ISM manufacturing index also signaled an economic recovery.

3 Energy Mutual Funds to Buy

Given this encouraging backdrop, we have highlighted three energy mutual funds below that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

These funds have encouraging four-week and year-to-date returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and no sales load.

Vanguard Energy Investor (VGENX - MF report) seeks growth of capital over the long run. VGENX invests the lion’s share of its assets in securities of companies engaged in operations related to the energy sector. The fund primarily invests in common stocks of companies.

Currently, VGENX carries a Zacks Mutual Fund Rank #1. The product has four-week and year-to-date returns of 11% and 6.1%, respectively. Annual expense ratio of 0.37% is lower than the category average of 1.51%.

Fidelity Select Energy (FSENX - MF report) invests a large chunk of its assets in common stocks of companies involved in the energy sector including oil, gas, electricity and solar power. FSENX invests in securities of companies throughout the globe. Factors such as financial strength and economic conditions are considered before investing in a company.

Currently, FSENX carries a Zacks Mutual Fund Rank #1. The fund has four-week and year-to-date returns of 10.8% and 1.9%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.51%.

Guinness Atkinson Global Energy (GAGEX - MF report) seeks long-term capital growth. GAGEX invests the major portion of its assets in equity securities of both domestic and foreign energy companies. The fund invests in companies irrespective of their market capitalization. It is non-diversified and may allocate assets in companies from emerging markets.

Currently, GAGEX carries a Zacks Mutual Fund Rank #2. One-month and year-to-date returns of GAGEX are respectively 11.6% and 3.1%. Annual expense ratio of 1.30% is lower than the category average of 1.51%.