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Energy ETFs: What Are the Key Quantitative Drivers?

PART:
1 2 3 4
Energy ETFs: What Are the Key Quantitative Drivers? PART 1 OF 4

Crude Oil Regains Momentum: Is It Impacting Energy ETFs?

US crude oil prices

On October 27, 2016, active futures contracts for US crude oil (UWTI) (USO) closed at $49.72—an ~1.1% rise compared to the previous trading session. The rise in crude oil prices could be attributed to a Reuters report citing OPEC gulf countries’ willingness to cut their crude oil production by 4% from record levels. It supported crude oil prices on October 27, along with the U.S. Energy Information Administration data showing a surprise fall in US crude oil inventories.

Crude Oil Regains Momentum: Is It Impacting Energy ETFs?

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From October 20 to October 27, 2016, US crude oil (DWTI) (USL)(OIIL) futures contracts for December delivery fell 1.8%. Earlier this week, crude oil prices were under pressure due to doubts surrounding OPEC’s deal and supply glut concerns.

Natural gas prices

Natural gas (UNG) December futures fell ~10.7% from October 20 to October 27, 2016, due to warmer weather that could curb or delay natural gas’s winter demand.

Performance of energy ETFs

Here’s how some energy ETFs performed between October 20 and October 27, 2016:

  • The Energy Select Sector SPDR ETF (XLE) fell ~1.5%.
  • The Alerian MLP ETF (AMLP) fell 1.6%.
  • The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell ~3.4%.
  • The VanEck Vectors Oil Services ETF (OIH) fell ~4.8%.

The performances of these ETFs corresponded with the fall in oil and gas prices during this period.

Understanding ETF performances

XOP underperformed XLE and AMLP from October 20 to October 27, 2016. Historically, XOP has had a higher correlation to crude oil than other energy ETFs. XOP has more upstream companies in its portfolio.

OIH also has a high correlation with crude oil because its businesses are directly linked to upstream companies’ drilling activities. OIH underperformed XLE, XOP, and AMLP in the trailing week. We’ll look at the correlation of energy ETFs and crude oil in Part 4 of this series.

Sentiments related to natural gas and crude oil (SCO) also impact other ETFs, including the ProShares Ultra Oil & Gas ETF (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).

In the next part of this series, we’ll compare the price performances of the United States Natural Gas ETF (UNG) and the United States Oil ETF (USO).

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