Why Weak Crude Could Get Painful for Energy Investors
Correlations of top energy ETFs with crude oil
In this final part of our series, we’ll look at the correlations of top energy ETFs with crude oil (SCO) and natural gas (BOIL) (GASL). At ~67.9%, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) showed the highest correlation with US crude oil from February 16, 2017, to March 16, 2017.
By comparison, the correlations of other energy ETFs with US crude oil over the last month are as follows:
- the Alerian MLP ETF (AMLP): ~65.3%
- the VanEck Vectors Oil Services ETF (OIH): ~65.4%
- the Energy Select Sector SPDR ETF (XLE): ~66.6%
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During the past month, all four of the above ETFs have seen their correlations with crude oil rise, as compared to their correlations over the past three months. With earnings season ending, the movements of energy ETFs seem to be realigning with the movement in crude oil ETFs.
How do top energy ETFs correlate with natural gas?
All of the above ETFs have had little correlation with natural gas (UNG) in the past month. This hasn’t changed much compared to the three-month snapshot. Importantly, all of these ETFs are more correlated with crude oil (USO) than natural gas (DGAZ), and so it appears that crude oil is the bigger driver among energy ETFs right now.
But remember, a positive correlation with crude oil means that any movement in crude oil could impact these ETFs directly. If crude oil falls, these ETFs will likely fall. This means that it’s a good idea to watch any movements in crude oil (UCO) (BNO) (DBO) in order to understand how these ETFs will perform.
In the meantime, keep an eye on Market Realist’s Energy & Power page for our weekly quantitative coverage of crude oil prices.