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This has been a cursed year for the oil sector. 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 (read: Global Oil Price War Begins: ETFs in Focus).
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. The oil market rout continued on Apr 21 too (read: OPEC Output Deal Cut: Will It Help Oil & Energy ETFs?).
WTI crude ETF United States Oil Fund, LP (USO - Free Report) and Brent ETF United States Brent Oil Fund, LP (BNO - Free Report) lost about 33.2% and 25.2%, respectively, in the past two days (as of Apr 21, 2020).
Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on fast-slumping crude prices as well as those that are likely to underperform.
Gainers
Transportation – iShares Transportation Average ETF (IYT - Free Report)
The transportation sector performs better in a falling crude scenario. This is especially true as energy costs form a major portion of the overall costs of this sector.Once the lockdowns are lifted globally, the sector would benefit from such an unprecedented slump in oil.
Lower energy prices are good news for retailers as consumers can have fatter wallets from energy savings and more money for discretionary spending, after the economy re-opens. This would be a much-needed relief for consumers after a long stay-at-home period.
Low oil prices are a plus for miners. Mining companies’ 50% production costs are closely linked to energy prices. Cheap oil despite the biggest output cut deal by the OPEC should work wonders for gold miners’ operating margins. In any case, gold will be in high demand due to its safe-haven status. Global policy stimulus would give further support to it.
Losers
Oil Explorer – Energy Select Sector SPDR Fund (XLE - Free Report)
This is the most obvious choice. If oil price is staging a downtrend on ample supplies, oil exploration and production stocks are sure to lose as these companies will be hit hard on the selling prices of the commodity they are pumping up. There will be capex cuts too along with buyback halt and stoppage in dividend payments in some cases.
Big banks have already raised concerns about severe economic downturns and worsening credit quality. With oil suffering to this extent, there will likely be a rise in delinquency rates from energy companies. Many small players are likely to file for bankruptcy protection (read: Winning ETF Strategies to Counter Epic Oil Rout).
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 may bear the brunt.
Image: Bigstock
Sector ETFs to Win or Lose on Oil Collapse
This has been a cursed year for the oil sector. 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 (read: Global Oil Price War Begins: ETFs in Focus).
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. The oil market rout continued on Apr 21 too (read: OPEC Output Deal Cut: Will It Help Oil & Energy ETFs?).
WTI crude ETF United States Oil Fund, LP (USO - Free Report) and Brent ETF United States Brent Oil Fund, LP (BNO - Free Report) lost about 33.2% and 25.2%, respectively, in the past two days (as of Apr 21, 2020).
Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on fast-slumping crude prices as well as those that are likely to underperform.
Gainers
Transportation – iShares Transportation Average ETF (IYT - Free Report)
The transportation sector performs better in a falling crude scenario. This is especially true as energy costs form a major portion of the overall costs of this sector.Once the lockdowns are lifted globally, the sector would benefit from such an unprecedented slump in oil.
Retail – SPDR S&P Retail ETF (XRT - Free Report)
Lower energy prices are good news for retailers as consumers can have fatter wallets from energy savings and more money for discretionary spending, after the economy re-opens. This would be a much-needed relief for consumers after a long stay-at-home period.
Gold Miners– VanEck Vectors Gold Miners ETF (GDX - Free Report)
Low oil prices are a plus for miners. Mining companies’ 50% production costs are closely linked to energy prices. Cheap oil despite the biggest output cut deal by the OPEC should work wonders for gold miners’ operating margins. In any case, gold will be in high demand due to its safe-haven status. Global policy stimulus would give further support to it.
Losers
Oil Explorer – Energy Select Sector SPDR Fund (XLE - Free Report)
This is the most obvious choice. If oil price is staging a downtrend on ample supplies, oil exploration and production stocks are sure to lose as these companies will be hit hard on the selling prices of the commodity they are pumping up. There will be capex cuts too along with buyback halt and stoppage in dividend payments in some cases.
Financials – SPDR S&P Bank ETF (KBE - Free Report)
Big banks have already raised concerns about severe economic downturns and worsening credit quality. With oil suffering to this extent, there will likely be a rise in delinquency rates from energy companies. Many small players are likely to file for bankruptcy protection (read: Winning ETF Strategies to Counter Epic Oil Rout).
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 may bear the brunt.
Shares of U.S. Steel (X - Free Report) and ArcelorMittal (MT - Free Report) , two of the world's largest steel producers, fell around 30% in the six-month period from September 2014 through February 2015 amid low oil prices.
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