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Oil Impacts Energy ETFs and the Equity Market

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On July 11–18, major energy ETFs had the following correlations with US crude oil active futures:

  • the Energy Select Sector SPDR ETF (XLE): 42%
  • the SPDR S&P Oil & Gas Exploration & Production ETF (XOP): 32.3%
  • the Alerian MLP ETF (AMLP): 23.1%
  • the VanEck Vectors Oil Services ETF (OIH): 12.3%
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Downside in energy ETFs

Notably, US crude oil active futures fell 8.1% last week, which might have been behind the downside in these energy ETFs, despite a lower correlation. XOP, OIH, XLE, and AMLP fell 7.7%, 7.5%, 2.6%, and 1.7%, respectively.

Natural gas

In the trailing week, XLE, XOP, OIH, and AMLP had correlations with natural gas active futures of 66.4%, 50.3%, 32.6%, and -34.2%, respectively. Overall, Natural gas active futures have fallen 5.3%. Based on the correlations and returns, the fall in natural gas prices might have dragged most of these energy ETFs.

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Equity markets impact energy ETFs

Energy ETFs had the following correlations with the S&P 500 last week:

  • OIH: 94.2%
  • XOP: 86.4%
  • XLE: 89.7%
  • AMLP: -18.6%

The S&P 500 (SPY) fell 0.2% on July 11–18. These correlations suggest a direct relationship between most of these energy ETFs and broader market sentiments. The broader market sentiments are usually more important to energy ETFs than the movement in oil prices, which is reflected in the correlation of OIH, XOP, and XLE. The expectation of a rate cut might explain the midstream stock outperformance.

US equity indexes

In the trailing week, US equity indexes’ correlations with US crude oil active futures were:

  • the Dow Jones Industrial Average: 63.1%
  • the S&P 500: 33.9%
  • the S&P Mid-Cap 400: 25.4%

These three equity indexes have exposure of approximately 5.1%, 5.2%, and 3.6% to the energy sector, respectively. The equity indexes returned 0.5%, -0.2%, and 0.2%, respectively, on July 11–18. US crude oil active futures fell by more than eight percentage points.

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Oil and equity indexes

The above figures indicate a direct relationship between oil and US equity indexes. Apart from individual factors, trade war concerns dominated the oil and the equity market. Earnings season was important for the equity market.

Energy and broader markets

In the trailing week, the Energy Select Sector SPDR ETF (XLE) fell 2.6%—the largest decline among the SPDR ETFs. The fall in oil prices and the broader market pulled XLE’s returns into the red territory. The Consumer Staples Select Sector SPDR ETF rose 1.1%—the highest rise in the SPDR ETFs that divide the broader market into different sectors.

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