Why Do Crude Oil and Natural Gas Drive Energy ETFs?



Correlation of top energy ETFs with crude oil

In this part of the series, we’ll look at the correlation of top energy ETFs that track oil and natural gas–related companies with crude oil and natural gas. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) had the highest correlation of 84% with US crude oil (USO) (UWTI) (DWTI) in the last month to June 30, 2016.

Below are the correlations of the top energy ETFs with US crude oil in that period:

  • Energy Select Sector SPDR ETF (XLE) – 73.3%
  • Alerian MLP ETF (AMLP) – 55.4%
  • VanEck Vectors Oil Services ETF (OIH) – 73.5%

Over the last three months, XOP had the highest correlation of 76.9% with US crude oil. XLE, AMLP, and OIH had correlations of 73.3%, 59.2%, and 69.6%, respectively, during that period.

Historically, XOP has a higher correlation to crude oil than other ETFs. It tracks crude oil closer than XLE because it has more upstream companies in its portfolio.

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Some of XOP’s constituents include Continental Resources (CLR), RSP Permian (RSPP), Diamondback Energy (FANG), Halcon Resources (HK), Synergy Resources (SYRG), and Kosmos Energy (KOS). Read Which Upstream Stocks Correlate Most Closely with Crude Oil? for an analysis of upstream stocks in XOP that are correlated the most to crude oil.

Interestingly, AMLP’s correlation with crude oil (OIIL) in the last month fell compared to the last three months.

How do top energy ETFs correlate with natural gas?

OIH’s correlation with natural gas (GASL) (BOIL) fell in the past month—compared to the last three months. On the other hand, AMLP’s correlation with natural gas increased significantly in the past month—compared to the last three months.

All of the ETFs we covered in this series are more correlated to crude oil than to natural gas. So, crude oil is the bigger driver for these energy ETFs. Positive correlations mean that a rise in crude oil will drive these ETFs higher. You should watch movements in crude oil to understand how these ETFs will perform.


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