Oil’s Firming, So Why Are Energy ETFs in a Slump?

US crude oil prices

On February 23, 2017, US crude oil (DBO) (OIIL) (USL) (SCO) futures contracts for April delivery closed at $54.45 per barrel—an~1.6% rise over the previous trading session. The rise followed an EIA (US Energy Information Administration) report showing that crude oil inventories rose by only 564,000 barrels, for the week ended on February 17, 2017.

Analysts had estimated a rise of 3.5 million barrels. However, inventory levels are at historic high levels, going back to at least 1982, according to the EIA data.

Oil’s Firming, So Why Are Energy ETFs in a Slump?

On February 23, 2017, active oil futures traded at a discount of $0.56 to the futures contracts 12 months ahead, the lowest since November 16, 2014. The fall in the spread could point to tightening in the crude oil demand-supply balance.

From February 16, 2017, to February 23, 2017, US crude oil (USL) (OIIL) futures contracts for April rose 1.3%. OPEC (Organization of the Petroleum Exporting Countries) a recorded 90% compliance rate with pledged production cut targets, in addition to an indication to extend the time period for its production cut deal, and these factors appear to have supported oil prices.

Natural gas prices

Natural gas (UNG) April futures fell ~7.5% from February 16, 2017, to February 23, 2017. On February 23, 2017, natural gas active futures rose 1.8% due to bullish natural gas inventories data. (We’ll discuss natural gas inventories in Part 3 of this series.) Notably, earlier in the week, higher temperatures had a negative impact on natural gas prices.

Performances of energy ETFs

Here’s how some energy ETFs performed from February 16, 2017, to February 23, 2017:

  • The Energy Select Sector SPDR ETF (XLE) fell 1%.
  • The Alerian MLP ETF (AMLP) fell 1%.
  • The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell 2.3%.
  • The VanEck Vectors Oil Services ETF (OIH) fell 0.9%.

Understanding ETF performances

The recent fall in energy ETFs corresponds to the performances of stock constituents of these ETFs. The large fall in natural gas could have also negatively impacted stocks in these ETFs.

Sentiments related to natural gas and crude oil (SCO) also impact ETFs like 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 of this series, we’ll analyze the price performance of the United States Oil ETF (USO).