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Sector ETFs to Win or Lose on Storm-Led Oil Price Jump
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This has been a cursed year for the oil sector as the coronavirus-led social distancing and lockdown have curbed global energy demand. Despite starting on a decent note, oil prices took a massive hit in March on a price war between Saudi Arabia and Russia. OPEC+ producers’ inability to crack an output cut deal and Saudi Arabia’s announcement that it will pump more oil led to the price war.
After a period of haggling, the coalition announced the biggest output cut deal in mid-April. Despite this, oil prices possibly received the biggest blow ever on Apr 20. Severe demand shocks emanated from the coronavirus-led lockdowns, still-ample supplies and most importantly storage crisis led the May WTI crude futures to plunge below zero for the first time in history on the day.
Oil Improving With Tropical Storms Giving the Latest Boost
However, after that early shock, oil recovered hugely as reopening trade started picking up. Also, vaccine and treatment hopes brightened the demand outlook. To add to the benefits, platform shut-ins in the Gulf of Mexico reached 82.4% of oil production, the Bureau of Safety and Environmental Enforcement reported (as quoted on oilprice.com), with 56.92% of gas production also shut in to avert the damaging impact of two tropical storms Marco and Laura heading that way, per oilprice.com.
Per Bloomberg, refiners on the Gulf Coast have been shuttering processing units, securing equipment or checking their emergency protocols to avert the hurricane. The shut-ins could result in a decline of about one million bpd in processing capacity. As a result, oil prices have been on a rise. WTI crude ETF United States Oil Fund, LP (USO - Free Report) gained 1.9% on Aug 26. It added about 0.3% after hours. The oil ETF advanced 5% past month (as of Aug 26, 2020).
Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on rise in crude prices as well as those that are likely to underperform.
Big banks have already raised concerns about severe economic downturns and worsening credit quality. There was a likelihood of a rise in delinquency rates from energy companies. However, an improving oil price scenario draws a brighter picture of financial or banking companies.
Steel producers are likely to get hurt if oil prices continue to crater. The industry supplies materials to build and expand oil drilling operations. In the face of massive capex cuts by drillers, steel companies bore the brunt. Now the rising oil scenario should benefit the steel sector.
Losers
Transportation – iShares Transportation Average ETF (IYT - Free Report)
The transportation sector performs worse in a rising crude scenario. This is because energy costs form a major portion of the overall costs of this sector.
High oil prices are a negative for miners. Mining companies’ 50% production costs are closely linked to energy prices. Cheap oil works wonders for gold miners’ operating margins. In any case, gold has been suffering now on receding safe-haven demand and overvaluation concerns.
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Sector ETFs to Win or Lose on Storm-Led Oil Price Jump
This has been a cursed year for the oil sector as the coronavirus-led social distancing and lockdown have curbed global energy demand. Despite starting on a decent note, oil prices took a massive hit in March on a price war between Saudi Arabia and Russia. OPEC+ producers’ inability to crack an output cut deal and Saudi Arabia’s announcement that it will pump more oil led to the price war.
After a period of haggling, the coalition announced the biggest output cut deal in mid-April. Despite this, oil prices possibly received the biggest blow ever on Apr 20. Severe demand shocks emanated from the coronavirus-led lockdowns, still-ample supplies and most importantly storage crisis led the May WTI crude futures to plunge below zero for the first time in history on the day.
Oil Improving With Tropical Storms Giving the Latest Boost
However, after that early shock, oil recovered hugely as reopening trade started picking up. Also, vaccine and treatment hopes brightened the demand outlook. To add to the benefits, platform shut-ins in the Gulf of Mexico reached 82.4% of oil production, the Bureau of Safety and Environmental Enforcement reported (as quoted on oilprice.com), with 56.92% of gas production also shut in to avert the damaging impact of two tropical storms Marco and Laura heading that way, per oilprice.com.
Per Bloomberg, refiners on the Gulf Coast have been shuttering processing units, securing equipment or checking their emergency protocols to avert the hurricane. The shut-ins could result in a decline of about one million bpd in processing capacity. As a result, oil prices have been on a rise. WTI crude ETF United States Oil Fund, LP (USO - Free Report) gained 1.9% on Aug 26. It added about 0.3% after hours. The oil ETF advanced 5% past month (as of Aug 26, 2020).
Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on rise in crude prices as well as those that are likely to underperform.
Gainers
Refiners – VanEck Vectors Oil Refiners ETF (CRAK - Free Report) )
This is the most obvious choice. The selling prices of refined oil should now be higher as refiners are shutting capacities.
Financials – SPDR S&P Bank ETF (KBE - Free Report)
Big banks have already raised concerns about severe economic downturns and worsening credit quality. There was a likelihood of a rise in delinquency rates from energy companies. However, an improving oil price scenario draws a brighter picture of financial or banking companies.
Steel – VanEck Vectors Steel ETF (SLX - Free Report)
Steel producers are likely to get hurt if oil prices continue to crater. The industry supplies materials to build and expand oil drilling operations. In the face of massive capex cuts by drillers, steel companies bore the brunt. Now the rising oil scenario should benefit the steel sector.
Losers
Transportation – iShares Transportation Average ETF (IYT - Free Report)
The transportation sector performs worse in a rising crude scenario. This is because energy costs form a major portion of the overall costs of this sector.
Retail – SPDR S&P Retail ETF (XRT - Free Report)
Higher energy prices are bad news for retailers as consumers will lose on energy savings and cut on discretionary spending despite economic reopening.
Gold Miners – VanEck Vectors Gold Miners ETF (GDX - Free Report)
High oil prices are a negative for miners. Mining companies’ 50% production costs are closely linked to energy prices. Cheap oil works wonders for gold miners’ operating margins. In any case, gold has been suffering now on receding safe-haven demand and overvaluation concerns.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>