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This has been a tough year for the oil sector. The WTI crude ETF (USO - Free Report) and the Brent crude ETF (BNO - Free Report) is down about 68.8% and 39.8%, respectively, this year. Despite starting on a decent note, oil prices took a massive hit in March on a price war between Saudi Arabia and Russia. After a period of haggling, the coalition announced the biggest output cut deal in mid-April.
But severe demand shocks emanated from the coronavirus-led lockdowns, still-ample supplies and most importantly a storage crisis led the May WTI crude futures to plunge below zero for the first time in the history in April.
Though oil prices recovered greatly from that catastrophe, it continued a subdued run on virus threat. Against this backdrop, Brent crude touched $50-level last week on a faster-than-expected launch of the COVID-19 vaccine, which in turn would result into a demand recovery.
Full recovery of oil prices will take time to materialize (probably in the latter half of next year, as deemed by the analysts). Still, sheer signs of improvement may bode well/spell trouble for the below-mentioned sector ETFs.
Gainers
Energy – SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This is the most obvious choice. If oil price is staging an uptrend on growing demand hopes, oil exploration and production stocks are sure to benefit as these companies will tend to pump more oil ahead.
Big banks have already raised concerns about severe economic downturns and worsening credit quality. If oil suffers for a prolonged period, there will likely be a rise in delinquency rates from energy companies. Many small players are likely to file for bankruptcy protection. So, an oil price recovery is great news for banks.
Steel producers are likely to gain if oil prices continue to rise. The industry supplies materials to build and expand oil drilling operations. Shares of U.S. Steel (X) and ArcelorMittal (MT), 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.
In the face of massive capex cuts by drillers in the peak of the pandemic, steel companies suffered a lot. Now the steel companies may heave a sigh of relief.
Rising energy prices do not bode well for retailers as consumers’ wallets get squeezed from higher outlays on gas station. This is going to hurt consumers directly.
Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. After taking crude, refiners transform it to the finished product gasoline. Now, with crude prices rising, refiners may see a lower crack spread and their profitability may be hurt.
The airline sector also 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. So, rising crude prices are likely to curb earnings of airline companies.
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 previously. Now, rising oil and growing risk-on sentiment (which curbs the safe-haven appeal for gold) will go against the gold miners.
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Sector ETFs to Win & Lose on Oil Price Rebound
This has been a tough year for the oil sector. The WTI crude ETF (USO - Free Report) and the Brent crude ETF (BNO - Free Report) is down about 68.8% and 39.8%, respectively, this year. Despite starting on a decent note, oil prices took a massive hit in March on a price war between Saudi Arabia and Russia. After a period of haggling, the coalition announced the biggest output cut deal in mid-April.
But severe demand shocks emanated from the coronavirus-led lockdowns, still-ample supplies and most importantly a storage crisis led the May WTI crude futures to plunge below zero for the first time in the history in April.
Though oil prices recovered greatly from that catastrophe, it continued a subdued run on virus threat. Against this backdrop, Brent crude touched $50-level last week on a faster-than-expected launch of the COVID-19 vaccine, which in turn would result into a demand recovery.
Full recovery of oil prices will take time to materialize (probably in the latter half of next year, as deemed by the analysts). Still, sheer signs of improvement may bode well/spell trouble for the below-mentioned sector ETFs.
Gainers
Energy – SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This is the most obvious choice. If oil price is staging an uptrend on growing demand hopes, oil exploration and production stocks are sure to benefit as these companies will tend to pump more oil ahead.
Financials – SPDR S&P Bank ETF (KBE - Free Report)
Big banks have already raised concerns about severe economic downturns and worsening credit quality. If oil suffers for a prolonged period, there will likely be a rise in delinquency rates from energy companies. Many small players are likely to file for bankruptcy protection. So, an oil price recovery is great news for banks.
Steel – VanEck Vectors Steel ETF (SLX - Free Report)
Steel producers are likely to gain if oil prices continue to rise. The industry supplies materials to build and expand oil drilling operations. Shares of U.S. Steel (X) and ArcelorMittal (MT), 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.
In the face of massive capex cuts by drillers in the peak of the pandemic, steel companies suffered a lot. Now the steel companies may heave a sigh of relief.
Losers
Retail - SPDR S&P Retail ETF (XRT - Free Report)
Rising energy prices do not bode well for retailers as consumers’ wallets get squeezed from higher outlays on gas station. This is going to hurt consumers directly.
Oil Refiners – VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. After taking crude, refiners transform it to the finished product gasoline. Now, with crude prices rising, refiners may see a lower crack spread and their profitability may be hurt.
Airlines - U.S. Global Jets ETF (JETS - Free Report)
The airline sector also 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. So, rising crude prices are likely to curb earnings of airline companies.
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 previously. Now, rising oil and growing risk-on sentiment (which curbs the safe-haven appeal for gold) will go against the gold miners.
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 >>