Oil prices have staged a rally lately with
United States Oil Fund LP ( USO Quick Quote USO - Free Report) and United States Brent Oil Fund LP ( BNO Quick Quote BNO - Free Report) adding about 7.8% and 7.5%, respectively, past month. This is comparison with 2.9% gains in the S&P 500 index.
Oil is up more than 50% this year. A host of factors aided the rally. Growing vaccine distribution and hefty stimulus under the Biden presidency along with a dovish Fed boosted hopes of a sooner-than-expected return to normalcy.
The latest boon came in the form of the failure of an OPEC+ deal. OPEC and its allies
could not crack an important deal on their oil output policy last week, due rising tensions between Saudi Arabia and the UAE. OPEC+ also abandoned its meeting without a deal, leading the oil market to face tight supplies and rising prices. Oil is now hovering around $75/barrel.
Oil prices could “very easily” touch $100 a barrel in the aftermath of the failed OPEC+ talks, per former U.S. Energy Secretary Dan Brouillette,
as quoted on CNBC. However, “if there isn’t any agreement on production, and countries tend to go off and do their own thing, or do their own production, you could have a collapse of oil prices,” also warned Brouillette.
OPEC+ is normally led by Saudi Arabia, a supporter of the UAE. But UAE’s objection to the terms, points to a rare disagreement between the duo. 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 Quick Quote 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 3.87% annually.
Financials – SPDR S&P Bank ETF ( KBE Quick Quote 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.
Steel – VanEck Vectors Steel ETF ( SLX Quick Quote 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.
Losers Retail - SPDR S&P Retail ETF ( XRT Quick Quote XRT - Free Report)
Steady rise in 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 Quick Quote 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 Quick Quote 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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