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Energy ETFs: What’s Driving Their Performance?

PART:
1 2 3 4
Energy ETFs: What’s Driving Their Performance? PART 1 OF 4

How Are Energy ETFs Reacting to Oil Prices and Inventory Data?

US crude oil prices

On January 5, 2017, the active futures contracts for US crude oil (USO) closed at $53.76—an ~0.9% rise compared to the previous trading session. On January 5, 2017, US commercial crude oil inventories fell by 7.1 MMbbls (million barrels) compared to analysts’ forecast of a fall of 1.8 MMbbls.

How Are Energy ETFs Reacting to Oil Prices and Inventory Data?

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From December 29, 2016, to January 5, 2017, US crude oil (USL) (OIIL) futures contracts for February delivery didn’t change. Oil prices fell 2.6% on January 3, 2017. The fall could be attributed to profit-booking. However, optimism around OPEC’s planned production cut led to a gain of 1.8% in crude oil prices on January 4, 2017.

Natural gas prices

Natural gas (UNG) February futures fell 13.9% from December 29, 2016, to January 5, 2017, due to warmer weather forecasts.

Performances of energy ETFs

Here’s how some energy ETFs performed from December 29, 2016, to January 5, 2017:

  • The Energy Select Sector SPDR ETF (XLE) rose 0.4%.
  • The Alerian MLP ETF (AMLP) rose 1.5%.
  • The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose 1%.
  • The VanEck Vectors Oil Services ETF (OIH) rose 3.3%.

The performances of energy ETFs such as XLE, XOP, AMLP, and OIH correspond to steady crude oil prices and a large fall in crude oil inventories.

Understanding ETF performances

XOP outperformed XLE from December 29, 2016, to January 5, 2017. Historically, XOP 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 the fortunes of its constituents are directly linked to upstream companies’ drilling activities. OIH outperformed XLE, AMLP, and XOP 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 (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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