Understanding the Driving Forces behind Energy ETFs
Correlations of top energy ETFs with crude oil
In this part, we’ll look at the correlations of top energy ETFs with crude oil (SCO) and natural gas (BOIL) (GASL). At ~35.7%, the VanEck Vectors Oil Services ETF (OIH) had the highest correlation with US crude oil from December 5, 2016–January 5, 2017.
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Let’s take a look at the correlations of the top energy ETFs with US crude oil over the last month:
- Alerian MLP ETF (AMLP) at ~31.7%
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP) at ~30.9%
- Energy Select Sector SPDR ETF (XLE) at ~25.5%
Over the last three months, OIH had an ~73.5% correlation with US crude oil. XLE, AMLP, and XOP had correlations of ~72%, ~51.1%, and ~71.6%, respectively, during the same period.
In the last month, all of the ETFs in our analysis—AMLP, OIH, XOP, and XLE—saw their correlations with crude oil fall compared to the last three months. Historically, XOP had a higher correlation with crude oil than other ETFs. It tracks crude oil closer 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.
How do top energy ETFs correlate with natural gas?
All of the ETFs also saw their correlations with natural gas (UGAZ) fall in the last month compared to the last three months. Currently, XOP has the smallest negative correlation with natural gas among the ETFs that we’re analyzing. However, all of the ETFs are more correlated with crude oil (USO) than natural gas (DGAZ). So, crude oil is the bigger driver for energy ETFs.
News surrounding OPEC (Organization of the Petroleum Exporting Countries) could be an important driver for these ETFs. A positive correlation with crude oil means that any move in crude oil driven by OPEC’s decision can impact these ETFs positively or negatively.