From July 3 to 11, major energy ETFs had the following correlations with US crude oil active futures:
- Energy Select Sector SPDR ETF (XLE): 97.6%
- VanEck Vectors Oil Services ETF (OIH): 95.3%
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP): 76.2%
- Alerian MLP ETF (AMLP): 54.2%
US crude oil active futures rose 5% in the trailing week, which might have been behind the upsides in these ETFs. OIH, XLE, AMLP and XOP rose 3.6%, 1.9%, 1.6% and 1.2%, respectively. AMLP had the lowest correlation with oil.
In the trailing week, OIH, XOP, XLE, and AMLP had negative correlations of 64%, 53.5%, 53%, and 28.6%, respectively, with natural gas active futures. Natural gas active futures have risen 5.3%. However, based on the correlations, all these energy ETFs might have moved inversely to natural gas prices.
Oil prices can have a significant impact on the entire energy sector—not just on oil-weighted stocks. US crude oil prices are important for understanding US natural gas supply. Oil prices are often important for the energy sector’s general sentiment, which explains the divergence in the correlations of these energy ETFs with oil and natural gas prices.
Energy ETFs have had the following correlations with the S&P 500 in the last week:
- AMLP: 85.1%
- XLE: 74.6%
- OIH: 53.1%
- XOP: 50.6%
The S&P 500 (SPY) rose just 0.1% between July 3 and July 11. These correlations suggest a direct relationship between these energy ETFs and the broader market sentiment. The broader market sentiment is usually more important to energy ETFs than the movement in oil prices. AMLP, which had the lowest correlation with oil prices, had the highest correlation with the broader market. The fall in the bond yield is another important factor for AMLP’s gains.
In fact, in the first half of 2019, AMLP exhibited a similar relationship with oil and the S&P 500 Index (SPY). AMLP had a stronger affiliation with the broader market, but on a long-term basis, oil spreads will play an important role in developing oil infrastructure.
US equity indexes
In the trailing week, US equity indexes’ correlations with US crude oil active futures were as follows:
These three equity indexes have exposures of ~3.6%, ~5.2%, and ~5.1%, respectively, to the energy sector. They returned 0.1%, -1.2%, and 0.5%, respectively, from July 3 to July 11, while US crude oil active futures rose five percentage points.
Oil and equity indexes
The above figures indicate a mixed relationship between oil and US equity indexes. In fact, individual factors dominated the oil and equity markets. The fall in US crude oil inventories fueled oil’s upside.
For the broader market, the expectation of a rate cut and concerns surrounding the trade war were an important factor. In fact, based on CME’s FedWatch Tool, there’s a 78.6% probability that the Fed will reduce interest rates by 25 basis points in its meeting on July 31. There’s also a 21.4% probability that the Fed will reduce interest rates by 50 basis points. If the Fed cuts interest rates, the energy sector could benefit in terms of interest liability. Moreover, any interest rate cut in the short term could boost economic growth expectations—a positive development for a growth-driven asset such as oil.
A possible cut in interest rates could further boost the Alerian MLP ETF (AMLP). According to Forbes, AMLP’s dividend yield is 7.8%, the highest in the energy subsector. Midstream stocks are preferred for their higher dividend yields. The SPDR S&P 500 ETF’s dividend yield is 1.8%.
Energy and broader markets
In the trailing week, the Energy Select Sector SPDR ETF (XLE) rose 1.9%, making it the highest gainer among the SPDR ETFs. The rise in oil prices pushed XLE’s returns into the green.
The broader market might also have supported XLE. The Materials Select Sector SPDR ETF (XLB) fell 2.3%, the highest fall among the SPDR ETFs. Most SPDR ETFs closed in the green.