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Oil and Equity Markets Are Key Catalysts for Energy ETFs

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Correlations

Between April 5 and April 12, 2018, energy subsector ETFs’ correlations with US crude oil May futures were as follows:

  • the Energy Select Sector SPDR ETF (XLE): 91.8%
  • the SPDR S&P Oil & Gas Exploration & Production ETF (XOP): 90.9%
  • the Alerian MLP ETF (AMLP): 90.5%
  • the VanEck Vectors Oil Services ETF (OIH): 82%

These four energy ETFs rose 3%, 3.2%, 2.1%, and 6.7%, respectively, in the seven calendar days to April 12, 2018. US crude oil May futures rose 5.6% over this time period.

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Natural gas

Between April 5 and April 12, 2018, energy subsector ETFs had negative correlations with natural gas May futures. In this period, XLE had the biggest negative correlation of -85.2%, while OIH had the smallest negative correlation of -68.9% with natural gas May futures. In the trailing week, natural gas May futures rose just 0.4%.

Equity markets

Between April 5 and April 12, 2018, these energy ETFs’ correlations with the S&P 500 Index (SPY) were as follows:

  • XLE at 82.5%
  • XOP at 78%
  • OIH at 75.5%
  • AMLP at 64.6%

Oil and equity markets

The S&P 500 Index (SPY) was unchanged in the trailing week, which could have limited the upside in these energy ETFs based on the correlations. The equity market sentiments could impact stocks despite underlying fundamental drivers. These ETFs hold energy stocks.

Based on the correlations, US crude oil active futures exceeding their three-year highs could have helped these energy ETFs to rise. On April 12, 2018, US crude oil May futures closed at $67.07 per barrel, their highest closing level in more than three years.

Next, we’ll discuss the statistical relationship between oil and the broader market.

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