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How Strong Gas Prices and Falling Yields Impacted Energy Sector

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Energy subsector ETFs

In the week ending July 5, major energy subsector ETFs had the following performances:

  • The Alerian MLP ETF (AMLP) rose 2%.
  • The VanEck Vectors Oil Refiners ETF (CRAK) rose 0.1%.
  • The VanEck Vectors Oil Services ETF (OIH) fell 1.3%.
  • The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) fell 2.7%.

Oil and energy ETFs

Last week, US crude oil prices fell 1.6%, while natural gas active futures rose 4.8%. The downturn in oil was more significant for energy ETFs than the fall in natural gas prices. In XOP, with the exception of Antero Resources (AR) and Cabot Oil and Gas (COG), natural gas-weighted stocks closed in the red. These energy stocks operate with production mixes of at least 60.0% in natural gas.

For AMLP, a rise of 1.7% in the broader market might have helped it to outperform. Another factor that might have contributed to the rise in AMLP is the fall in bond yields. Investors tend to prefer midstream stocks for their higher dividend yield. AMLP’s dividend yield is at 7.8%, the highest in the energy subsector. The SPDR S&P 500 ETF (SPY) offers a dividend yield of 1.8%.

Apart from lower oil prices, the fall in the US oil rig count could be behind oilfield services stocks’ underperformance. Last week, the oil rig count was at 788, at its more than its one-year low. A slowdown in US drilling activities might concern OIH.

Last week, gasoline prices rose 1.7% and outperformed the weakness in oil prices. The shutdown at the Philadelphia Energy Solutions could be behind it. The Philadelphia Energy Solutions refinery has a refining capacity of 335,000 barrels per day. Since June 20, the United States Gasoline Fund LP (UGA), which follows gasoline prices, rose 5.9%. Moreover, UGA outperformed a fall of 0.2% in the United States Oil Fund LP (USO), which tracks US crude oil futures. US downstream stocks constitute ~31.7% of CRAK.

Energy sector’s performance

Last week, the Energy Select Sector SPDR ETF (XLE) fell 1%. XLE had the highest decline among the sector-specific SPDR ETFs under review. Bearish sentiments in oil prices might have dragged XLE. However, a rise in the S&P 500 Index might have limited XLE’s downfall. The Real Estate Select Sector SPDR Fund (XLRE) rose 2.6% and outperformed the SPDR ETFs. Except XLE all other sector-specific SPDR ETFs closed in the green last week.

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