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Sector ETFs to Benefit/Lose as Oil May Hit $70 Soon

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Oil prices have staged a rally lately with United States Oil Fund LP (USO - Free Report) and United States Brent Oil Fund LP (BNO - Free Report) adding about 12.2% and 16.1%, respectively, past month.

A host of factors aided the rally. Growing vaccine distribution and hopes of hefty stimulus under the Biden presidency along with a dovish Fed boosted hopes of a sooner-than-expected return to normalcy.

Then a freezing weather instigated the oil rally in February as oil wells got shut in. “Water is produced along with oil, that water can freeze up equipment,” oil analyst Andy Lipow wrote last month, as quoted on CNBC.

The latest boon came in the form of the surprise decision from the OPEC+ that it would not relax supply curbs despite the recent rebound in global economic growth. Major banks from Goldman Sachs to J.P. Morgan upgraded crude price forecasts, per a Bloomberg article.

Per the article, the OPEC producer coalition agreed to keep output steady in April, while Saudi Arabia will stick to its one million barrel-a-day voluntary production cut.  The latest OPEC+ deal was struck on Mar 4. The group will meet next on Apr 1 to discuss output levels for May.

USO and BNO both jumped 4.7% and 4.9%, respectively. Goldman Sachs Group Inc. raised its Brent forecast by $5 a barrel and now expects the global crude benchmark to be at $80 in the third quarter. JPMorgan Chase & Co. boosted its Brent forecast by $2 to $3 a barrel and Australia & New Zealand Banking Group Ltd. beefed up its three-month target to $70. Citigroup sees the prices breaching the $70 level before the end of March, as quoted on Bloomberg.

Why Did OPEC+ Decide to Stay Put?

Saudi Arabia’s bet on the continuation of the production curb is based on its assumption that higher oil prices will not prompt American shale drillers to produce more this time, per the Bloomberg article. Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg News after the OPEC+ meeting that shale companies have now put attention to dividends.

Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on rising crude prices as well as the ones that are likely to underperform.

Gainers

Energy – Energy Select Sector SPDR Fund (XLE - Free Report)

This is the most obvious choice. If oil price is staging an uptrend on reduced supplies, oil exploration and production stocks are sure to benefit as these companies will have a chance to pump more oil over the medium term. Plus, the fund yields 4.34% annually.

Financials – SPDR S&P Bank ETF (KBE - Free Report)

Big banks raised concerns in the pandemic-ridden 2020 about severe economic downturns and worsening credit quality. With oil prices suffering that time, there was the likelihood of a rise in delinquency rates from energy companies. With the situation in the oil patch improving and bond yields rising, banks now have every reason to cheer (read: Great Rotation From Bonds to Stocks: ETFs to Win).

Steel – VanEck Vectors Steel ETF (SLX - Free Report)

Steel producers underperform if oil prices crater. The industry supplies materials to build and expand oil drilling operations. Since an oil price rally can result in more capital expenditure by drillers, steel stocks should soar even higher (read: U.S. Manufacturing at 3-Year High: ETFs in Focus).

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.

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 buying 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 cost of this sector. So, rising crude prices are likely to curb earnings of airline companies.

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