Impact of the Relationship between Energy ETFs and Oil

Correlations of top energy ETFs with crude oil

In this part of the series, we’ll look at the correlations of top energy ETFs with crude oil (SCO) and natural gas (BOIL) (GASL). At ~65.0%, the Energy Select Sector SPDR ETF (XLE) showed the highest correlation with US crude oil between March 20, 2017, and April 20, 2017.

Impact of the Relationship between Energy ETFs and Oil

In comparison, the correlations of other energy ETFs with US crude oil over the last month are as follows:

  • Alerian MLP ETF (AMLP): 45.1%
  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP): 62.8%
  • VanEck Vectors Oil Services ETF (OIH): 63.7%

In the past month, all of the above ETFs except AMLP saw their correlations with crude oil rise compared to their correlations over the past three months. As we saw in the first part of this series, AMLP outperformed these ETFs and crude oil over the trailing week.

After the 4Q16 earnings season, the movements of energy ETFs seem to have realigned with the movements in crude oil. So with the start of the 1Q17 earnings season in the coming days, the correlation of energy ETFs with crude oil could fall again.

How do top energy ETFs correlate with natural gas?

All of the above ETFs witnessed a rise in their correlations with natural gas (UNG) in the past month compared to the three-month snapshot. However, all of them are more correlated with crude oil (USO) than natural gas (DGAZ). Right now, crude oil is the bigger driver for energy ETFs.

A high positive correlation with crude oil means that any movement in crude oil could impact these ETFs directly. If crude oil rises, these ETFs will likely rise as well. You should watch movements in crude oil (UCO) (BNO) (DBO) in order to understand how these ETFs could perform.

US crude oil will likely post its first weekly loss for the week ending April 21, 2017, after three consecutive weekly gains. At 12:26 AM EST on April 21, 2017, US crude oil June futures were trading at $50.77 per barrel, a fall of 5.3% compared to last week’s closing price.

If the fall continues and the high correlations hold, they could contribute to more downside in these energy ETFs. You should also track individual stocks as the earnings season is set to begin.

You can keep an eye on Market Realist’s earnings coverage on the Energy & Power page. You can also track our weekly quantitative coverage of crude oil prices on Wednesdays.