How Do Energy ETFs Perform during Falling Energy Prices?

On July 21, 2016, US crude oil (USO) (OIIL) active futures contracts closed at $44.57. That was 13% lower than its 2016 high of $51.23 on June 8, 2016. From July 14 to July 21, 2016, crude oil prices fell due to renewed supply glut concerns.

On Wednesday, July 20, US crude oil rose 0.66% after crude oil inventories were reported to have fallen by 2.3 MMbbls (million barrels) in the week ending July 15. Analysts were expecting a larger draw of 2.1 MMbbls. However, US crude oil fell 2.2% on July 21 as the surprise gasoline build worried investors. Gasoline stocks were up by 911,000 barrels despite the summer driving season.

From July 14 to July 21, the US crude oil futures contract for September delivery fell ~3.4%. Natural gas active futures fell about 1.3%. The fall in energy ETFs could be attributed to the fall in oil prices. In Part 4 of this series, we’ll analyze the correlations between these ETFs and crude oil and natural gas.

Below are the performances of XOP and other energy ETFs for that period:

• The Energy Select Sector SPDR ETF (XLE) fell 1.7%.
• The Alerian MLP ETF (AMLP) fell 0.04%.
• The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell 2.7%.
• The VanEck Vectors Oil Services ETF (OIH) fell 3.3%.

The fall in the above ETFs started after the fall in oil prices on July 18, 2016, as supply glut fears grabbed the oil market. AMLP fell only 0.04% because falling crude oil has less of an impact on midstream companies than other energy subindustries.

OIH fell the most as the renewed fear of a supply glut could impact the drilling activity. This could impact oil field services companies.

Historically, XOP has a higher correlation to crude oil than other ETFs. We’ll look at the correlation between energy ETFs and crude oil in Part 4 of this series. XOP is impacted more by crude oil prices than XLE because it has more upstream companies in its portfolio. As a result, XOP fell more than XLE. From July 14, 2016, to July 21, 2016, crude oil futures fell 3.6%. Later in this series, we’ll look at XLE’s performance.

Below are XOP’s top gainers from July 14 to July 21:

• Chesapeake Energy (CHK) – 10.4%
• Abraxas Petroleum (AXAS) – 7.6%
• Rex Energy (REXX) – 5.1%

Now, let’s look at XOP’s top losers for that period:

• Bonanza Creek Energy (BCEI) at -24.1%
• Comstock Resources (CRK) at -17.4%
• California Resources (CRC) at -12.6%

Sentiments related to natural gas and crude oil also impact ETFs. Some of these ETFs include the ProShares Ultra Oil & Gas (DIG), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), the iShares US Energy (IYE), and the Fidelity MSCI Energy ETF (FENY).

In the next part, we’ll look at the price performance of the United States Natural Gas ETF (UNG) and the United States Oil ETF (USO).