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Exhausted Energy: Why Energy ETFs Could Plunge

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Exhausted Energy: Why Energy ETFs Could Plunge PART 1 OF 5

Are Energy ETFs Outperforming Crude Oil?

US crude oil prices

On March 16, 2017, US crude oil (DBO) (OIIL) (USL) (SCO) futures contracts for April delivery closed at $48.75 per barrel, which represents a ~0.2% fall over the previous trading session. Concerns about rising US oil production had weighed on oil prices, despite the fall of 0.23 million barrels in US oil inventories. But US crude oil inventories reached ~528.2 million barrels in the week ended March 10, 2017, closing at record highs.

Are Energy ETFs Outperforming Crude Oil?

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Crude oil futures

Currently, active crude oil futures are trading at a discount of $1.68 to the 12-month futures contract. On March 14, 2017, active oil futures were trading at a discount of $2.08 to the 12-months ahead futures contract, the highest level since February 9, 2017.

The fall in the futures spread on March 16 could point to the easing of investor concerns about the crude oil demand-supply balance. From March 9, 2017, to March 16, 2017, US crude oil futures contracts for April fell 1.1%. In the last five trading sessions, WTI crude oil April futures traded between $47.09 and $50.84 per barrel.

During the same period, the S&P 500 Index (SPY) (SPX-INDEX) rose 0.7%, and the Dow Jones Industrial Average (DIA) (DJIA-INDEX) rose 0.4%. The tech-heavy NASDAQ Composite (QQQ) (COMP-INDEX) rose 0.2% over this period.

Natural gas prices

Natural gas (UNG) April futures fell 2.4% from March 9, 2017, to March 16, 2017. On March 16, 2017, natural gas active futures fell 2.7% and closed at $~$2.90 per MMBtu (million British thermal units). On the same day, the EIA (US Energy Information Administration) announced the natural gas inventory data for the week ended March 10, 2017.

Earlier that same week, cooler weather forecasts contributed to the rise in natural gas prices. However, prices fell due to the warmer weather forecast and bearish inventory data. Natural gas traded between $2.88 and $3.1 per MMBtu in the past five trading sessions.

Performances of energy ETFs

Here’s how some energy ETFs performed between March 9 and March 16, 2017:

  • The Energy Select Sector SPDR ETF (XLE) rose 0.2%.
  • The Alerian MLP ETF (AMLP) rose 0.1%.
  • The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) rose 1%.
  • The VanEck Vectors Oil Services ETF (OIH) rose 1.3%.

Understanding ETF performances

The rise in all four ETFs corresponds with the rebound in crude oil prices on March 15, 2017. WTI crude oil active futures rose 2.4% on that day.

Remember, sentiments related to natural gas and crude oil (SCO) also impact ETFs such as the iShares Global Energy (IXC), the ProShares Ultra Oil & Gas (DIG), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the iShares US Energy ETF (IYE), and the Fidelity MSCI Energy ETF (FENY).

Now let’s take a closer look at the performance of the United States Oil ETF (USO).

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