At ~64.1%, the Alerian MLP ETF (AMLP) had the highest correlation with US crude oil from October 10 to November 10, 2016.
Let’s take a look at the correlations of the top energy ETFs with US crude oil over the last month:
Over the last three months, XOP had an 81.1% correlation with US crude oil. XLE, AMLP, and OIH had correlations of ~76.7%, ~58.4%, and ~77.4%, respectively, with crude oil during the same period.
XOP’s correlation with crude oil fell in the last month compared to the last three months. During this period, XLE and OIH also saw their correlations with crude oil fall, while AMLP’s correlation rose. Historically, XOP has a higher correlation with crude oil than other ETFs. It tracks crude oil more closely because it has more upstream companies in its portfolio.
OIH’s high correlation with crude oil is also understandable. The fortunes of the companies it tracks are directly linked to upstream company activity.
All of the ETFs that we’ve analyzed in this series have seen their correlations with natural gas (UGAZ) rise in the last month compared to the last three months. Currently, AMLP has the highest correlation with natural gas among the ETFs that we’ve analyzed. However, all of these ETFs are more correlated with crude oil (UWTI) (USO) than with natural gas (DGAZ). So, crude oil is the bigger driver for energy ETFs.
A positive correlation with crude oil means that more weakness in crude oil could drive these ETFs lower. A low correlation with natural gas means that these ETFs likely won’t be affected as much by the recent weakness in natural gas.