Why Did USO Trade Better than XOP?



Accessibility to crude oil

As you noticed in the first part of this series, WTI (West Texas Intermediate) crude oil futures fell more than 2% in the week ending December 18—compared to the prices for the week ending December 11. The compared futures equity market provides retail investors with easy access. Investors can also access WTI crude oil prices through energy commodity ETFs.

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ETFs track WTI crude oil prices

If you think about energy ETFs, the first option would be an ETF like the United States Oil ETF (USO). It holds the front month NYMEX futures on WTI crude oil prices. It trades in the NYSE like a common stock. The fund underperformed in the week ending December 18. It yielded -0.74% returns on a daily basis and -3.70% returns on a weekly basis.

The second option would be an ETF like the SPDR S & P Oil & Gas Exploration & Production ETF (XOP). XOP offers an equal-weighted approach to oil and gas exploration and production. This means that the portfolio is diversified. Its holdings don’t exceed 3%. So, the ETF’s performance can’t be influenced by the single stock performance. XOP was the lowest performer in the last week—compared to USO and WTI. On December 18, it yielded -2.1% returns on a daily basis and -8.0 % on a weekly basis.

Analyzing performances

As you can see from the above graph, WTI crude oil, XOP, and USO yielded negative returns in the last week. WTI crude oil prices are under pressure due to the supply glut. Due to crude oil prices, these ETFs also ended the negative. USO moved in the same direction as WTI. In the end, WTI slightly outperformed due to the short covering of positions on a stronger dollar.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) also tracks investments from refining companies and equipment services companies like Western Refining (WNR), Valero Energy (VLO), Tesoro (TSO), and Phillips 66 (PSX). Heavy inventory builds and less demand for the refined products lowered refined products’ prices and decreased the refinery utilization rate. This has a negative impact on refineries’ revenue. Due to its holdings in refining companies, XOP’s prices fell last week.


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