Why Is Crude Oil the Fundamental Driver for 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 ~55.7%, the Alerian MLP ETF (AMLP) had the highest correlation with US crude oil from January 2, 2017, to February 2, 2017. It explains the similar returns of AMLP and crude oil we discussed in Part 1 of this series earlier.
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Let’s take a look at the correlations of other energy ETFs with US crude oil over the last month:
- Energy Select Sector SPDR ETF (XLE) at ~46.9%
- VanEck Vectors Oil Services ETF (OIH) at ~41.7%
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP) at ~46.9%
Over the last three months, XLE had an ~67.3% correlation with US crude oil. OIH, AMLP, and XOP had correlations of ~65.6%, ~47.6%, and ~66.4%, respectively, during the same period.
In the last month, OIH, XOP, and XLE saw their correlations with crude oil fall—compared to the last three months. AMLP represents the midstream energy sector. AMLP was the only energy ETF, among those being analyzed in this series, to see its correlation with crude oil rise in the last month—compared to the last three months.
How do top energy ETFs correlate with natural gas?
All of the ETFs except OIH saw their correlations with natural gas (UGAZ) rise in the last month—compared to the last three months. In the trailing month, XOP had the highest positive correlation with natural gas among the ETFs that we’re analyzing.
A positive correlation with crude oil means that any move in crude oil can impact these ETFs directly. If crude oil goes up, these ETFs will also gain. So, it’s a good idea to watch crude oil’s (UCO) (BNO) movements in order to understand how these ETFs will perform.