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What Lies Ahead for Oil & Energy ETFs in the Near Term?
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After staying above $80 per barrel for past few weeks (and even crossing the $90-mark in late September), oil prices declined below the $80 per barrel mark for the first time in over two months. This decline was driven by fresh doubts surrounding the demand destruction, which outweighed the supply cuts from Saudi Arabia and Russia.
Rising rate worries resurfaced again as Minneapolis Fed President Neel Kashkari said it’s too soon to declare that the fight against inflation is over, though price pressures are easing. This boosted bond yields at the start of this week and strengthened the greenback and flared up recessionary fears all over again.
Inside the Headwinds
Oil prices experienced a significant drop lately, primarily due to concerns about declining fuel demand and a worsening macroeconomic outlook. Over the past week, crude oil prices have fallen by approximately $10 from their previous settlement.
Demand Destruction: The U.S. Energy Information Administration (EIA) reported that finished motor gasoline supplied, which serves as a proxy for demand, dropped to about 8 million barrels per day (bpd) last week, marking its lowest level since the beginning of the year. Some of this demand destruction could be attributed to factors like heavy rains and flooding in New York and post-tropical storm Ophelia, which brought torrential downpours to the Northeast in late September, per Reuters.
Refining Margins Decline: Crack spreads, which serve as a proxy for refining margins, fell to their lowest level in about 1.5 years, dropping below $20 per barrel. This decline suggests that high prices and interest rates are discouraging crude inventory purchases and raising concerns about a potential recession. The U.S. services sector slowed in September. This contributed to concerns about the broader economy’s bleak outlook.
Any Ray of Hope?
OPEC+ Supply Cuts Continue: Saudi Arabia and Russia, leaders of the OPEC+ alliance, announced lately that they would prolong their supply cuts until the end of the year. However, these measures, along with the ongoing conflict between Israel and Hamas, have not been enough to halt the decline in oil prices.
Kuwait's oil minister expressed optimism, stating that oil markets were moving in the "right direction" by balancing supply and demand. Russian Deputy Prime Minister Alexander Novak also acknowledged the positive impact of Saudi and Russian cuts on market balance, noting the benefits of the Kremlin's diesel and gasoline export ban in the domestic market.
Geopolitical Risks Overlooked:Several analysts note that the market appears to be overlooking the likely disruption caused by elevated geopolitical risks. Weak economic growth in Europe is adversely affecting manufacturing, resulting in a lower demand for oil.
ETFs in Focus
Against this backdrop, below we highlight a few popular energy ETFs that may be watched closely in the near term.
Energy Select Sector SPDR Fund (XLE - Free Report) – Down 1.6% Past Week
Vanguard Energy ETF (VDE - Free Report) – Down 1.9% Past Week
Image: Bigstock
What Lies Ahead for Oil & Energy ETFs in the Near Term?
After staying above $80 per barrel for past few weeks (and even crossing the $90-mark in late September), oil prices declined below the $80 per barrel mark for the first time in over two months. This decline was driven by fresh doubts surrounding the demand destruction, which outweighed the supply cuts from Saudi Arabia and Russia.
Rising rate worries resurfaced again as Minneapolis Fed President Neel Kashkari said it’s too soon to declare that the fight against inflation is over, though price pressures are easing. This boosted bond yields at the start of this week and strengthened the greenback and flared up recessionary fears all over again.
Inside the Headwinds
Oil prices experienced a significant drop lately, primarily due to concerns about declining fuel demand and a worsening macroeconomic outlook. Over the past week, crude oil prices have fallen by approximately $10 from their previous settlement.
Demand Destruction: The U.S. Energy Information Administration (EIA) reported that finished motor gasoline supplied, which serves as a proxy for demand, dropped to about 8 million barrels per day (bpd) last week, marking its lowest level since the beginning of the year. Some of this demand destruction could be attributed to factors like heavy rains and flooding in New York and post-tropical storm Ophelia, which brought torrential downpours to the Northeast in late September, per Reuters.
Refining Margins Decline: Crack spreads, which serve as a proxy for refining margins, fell to their lowest level in about 1.5 years, dropping below $20 per barrel. This decline suggests that high prices and interest rates are discouraging crude inventory purchases and raising concerns about a potential recession. The U.S. services sector slowed in September. This contributed to concerns about the broader economy’s bleak outlook.
Any Ray of Hope?
OPEC+ Supply Cuts Continue: Saudi Arabia and Russia, leaders of the OPEC+ alliance, announced lately that they would prolong their supply cuts until the end of the year. However, these measures, along with the ongoing conflict between Israel and Hamas, have not been enough to halt the decline in oil prices.
Kuwait's oil minister expressed optimism, stating that oil markets were moving in the "right direction" by balancing supply and demand. Russian Deputy Prime Minister Alexander Novak also acknowledged the positive impact of Saudi and Russian cuts on market balance, noting the benefits of the Kremlin's diesel and gasoline export ban in the domestic market.
Geopolitical Risks Overlooked: Several analysts note that the market appears to be overlooking the likely disruption caused by elevated geopolitical risks. Weak economic growth in Europe is adversely affecting manufacturing, resulting in a lower demand for oil.
ETFs in Focus
Against this backdrop, below we highlight a few popular energy ETFs that may be watched closely in the near term.
Energy Select Sector SPDR Fund (XLE - Free Report) – Down 1.6% Past Week
Vanguard Energy ETF (VDE - Free Report) – Down 1.9% Past Week
Alerian MLP ETF (AMLP - Free Report) – Up 2.6% Past Week
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) – Down 3.9% Past Week
iShares Global Energy ETF (IXC - Free Report) – Down 1.2% Past Week
iShares Global Clean Energy ETF (ICLN - Free Report) – Up 3.0% Past Week
VanEck Oil Services ETF (OIH - Free Report) – Down 2.7% Past Week