Broader Market Might Have Limited the Upside in Energy ETFs

Between December 27 and January 3, major energy ETFs had the following correlations with US crude oil February futures:

• the VanEck Vectors Oil Services ETF (OIH): 98.2%
• the SPDR S&P Oil & Gas Exploration & Production ETF (XOP): 41.9%
• the Energy Select Sector SPDR ETF (XLE): 40.1%
• the Alerian MLP ETF (AMLP): 24%

US crude oil February futures rose 5.6% in the trailing week. OIH, AMLP, XOP, and XLE rose 3.5%, 3.1%, 1.3%, and 0.7%, respectively. OIH, which outperformed other energy ETFs, might have been influenced by US crude oil prices. OIH had the highest correlation with US crude oil prices. US crude oil prices rose 5.6% in this period.

In the trailing week, OIH, AMLP, XOP, and XLE had correlations with natural gas February futures of 85.6%, 36.4%, 35.9%, and 19.5%, respectively. Natural gas February futures fell 16.9%. Based on the correlations, oil could be an important driver for most of these energy ETFs.

Energy ETFs had the following correlations with the S&P 500 Index in the past four trading sessions:

• XLE: 60.1%
• XOP: 40.9%
• AMLP: 26%
• OIH: -18.4%

The S&P 500 Index (SPY) fell 1.6% in the trailing week. The fall in the broader market might have limited the upside in most of these ETFs. In fact, XLE, which had the highest correlation with the S&P 500, had underperformed other energy ETFs in the trailing week. The sentiments in the equity market are also an important driver for energy ETFs. Notably, OIH, which had a mild negative correlation with the S&P 500 had the highest correlation with oil in the past four trading sessions.

Next, we’ll discuss oil’s correlation with the equity market.