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Memo to Energy Investors—Watch for Rising Crude Oil Production

PART:
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Part 3
Memo to Energy Investors—Watch for Rising Crude Oil Production PART 3 OF 5

Equity Market or Energy Commodities: Which Impacts Energy ETFs More?

Energy ETFs

Between July 6 and July 13, 2017, the Alerian MLP ETF (AMLP) gained the least among major energy subsector ETFs such as the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the Energy Select Sector SPDR ETF (XLE), and the VanEck Vectors Oil Services ETF (OIH).

Equity Market or Energy Commodities: Which Impacts Energy ETFs More?

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In the week ended July 13, 2017, AMLP gained only 0.3%. AMLP had a correlation of just -0.4% with US crude oil active futures during this period.

On the other hand, XLE, OIH, and XOP had respective correlations of 95.9%, 79.7%, and 60.4% with US crude oil active futures between July 6 and July 13, 2017. During this period, US crude oil active futures rose 1.2%. XLE, OIH, and XOP rose 1.4%, 3.4%, and 2.8%, respectively, in the week ended July 13, 2017.

Natural gas’s impact on energy ETFs

In the week ended July 13, 2017, AMLP had a negative correlation of 48.7% with natural gas futures. On the other hand, XLE, OIH, and XOP had respective positive correlations of 54.4%, 46.3%, and 69.6% with natural gas active futures. 

Although natural gas futures gained 2.5% in the week ended July 13, 2017, returns of these three energy ETFs are more in line with oil’s gain, based on the magnitude of correlations.

Based on these correlations, AMLP’s moves were less dependent on energy commodities. AMLP had a correlation of 59.7% with the S&P 500 Index (SPY), while XLE, OIH, and XOP had correlations of -73.3%, -81.7%, and -85.7%, respectively, with the broad equity market index between July 6 and July 13, 2017. The S&P 500 Index (SPY) rose 1.6% between July 6 and July 13, 2017.

Last week, oil was a primary driver of energy ETFs. However, sentiment in the broader market can also influence energy ETFs.

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