Crude Oil’s Ups and Downs: Analyzing Energy ETFs
US crude oil prices
On August 25, 2016, active futures contracts for US crude oil (UWTI) (USO) (OIIL) (USL) (SCO) (DWTI) closed at $47.33. That’s a rise of 1.2% compared to the previous trading session. It’s 7.6% lower than the 2016 high of $51.23 on June 8, 2016.
Interested in OIIL? Don't miss the next report.
Receive e-mail alerts for new research on OIIL
Earlier this week, crude oil gained on hopes that Iran could join fellow OPEC (Organization of the Petroleum Exporting Countries) members to discuss a potential production freeze. On August 25, 2016, the gain in oil prices was due to more indications from Iran on its willingness to join these discussions. Iran had been a major stumbling block in earlier attempts.
But from August 18 to August 25, US crude oil futures contracts for October delivery fell by ~3.2%. Most of the loss could be attributed to renewed supply glut fears.
Natural gas active futures (UNG) rose by ~6.4% over this period on supply disruption fears in the US Gulf of Mexico and an easing demand supply gap. The fall in energy ETFs could be attributed to the fall in oil prices. Later in this series, we’ll analyze the correlations between these ETFs and crude oil and natural gas.
Performance of energy ETFs
Below are the performances of some energy ETFs from August 18 to August 25:
- Energy Select Sector SPDR ETF (XLE): fell by ~1.9%
- Alerian MLP ETF (AMLP): fell by ~2%
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP): fell by ~1.9%
- VanEck Vectors Oil Services ETF (OIH): fell by ~3.9%
The fall in the above ETFs concurred with the fall of oil prices during this period.
Historically, XOP has had a higher correlation to crude oil (UWTI) (USO) (OIIL) (USL) (SCO) (DWTI) than other energy ETFs. XOP is impacted more by crude oil prices than the Energy Select Sector SPDR ETF (XLE), the Alerian MLP ETF (AMLP), and the VanEck Vectors Oil Services ETF (OIH). That’s because it has more upstream companies in its portfolio. OIH also has a high correlation because its businesses are directly linked to upstream companies’ drilling activities.
As a result, XOP recovered faster than XLE, AMLP, and OIH with the recovery in oil prices on August 23, 2016. US crude oil October futures rose 1.5% that day, and XOP rose 1.7%, outperforming other energy ETFs. Later in this series, we’ll look at XLE’s performance.
Sentiments related to natural gas (UNG) and crude oil (SCO) (DWTI) also impact ETFs. Some of these ETFs include the ProShares Ultra Oil & Gas (DIG), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the iShares US Energy (IYE), and the Fidelity MSCI Energy ETF (FENY).