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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 2.3% and 3%, respectively, in the past five days.
A host of factors aided the rally. Most recently, an industry data showed a larger-than-expected drawdown in U.S. crude stockpiles. Also, expectations of higher demand thanks to growing vaccine distribution along with a still-dovish Fed boosted hopes of higher oil consumption. Brent hit its highest levels since late July and WTI since early August, per CNBC.
“The impact of Hurricane Ida was a lot greater than many anticipated and production in the Gulf of Mexico region might struggle to return until Tropical Storm Nicholas is done punishing the region with torrential rain,” said Edward Moya, senior analyst at OANDA, as quoted on CNBC.
Tropical Storm Nicholas also played its role in boosting oil prices. The storm moved slowly through the Gulf Coast, causing catastrophe. Devastation from the storm just after Hurricane Ida kept considerable amount of Gulf Coast refining capacity offline.
The International Energy Agency (IEA) said on Tuesday vaccine roll-outs would boost a rebound in the energy market. Talks of booster shots are also added advantage for the oil market (read: ETFs to Rise on Full FDA Approval for Pfizer COVID-19 Vaccine).
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 higher drawdown, 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 4.36% annually.
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 (with Fed taper talks), banks now have every reason to cheer.
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.
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.
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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Sector ETFs to Benefit/Lose as Oil Crosses $70
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 2.3% and 3%, respectively, in the past five days.
A host of factors aided the rally. Most recently, an industry data showed a larger-than-expected drawdown in U.S. crude stockpiles. Also, expectations of higher demand thanks to growing vaccine distribution along with a still-dovish Fed boosted hopes of higher oil consumption. Brent hit its highest levels since late July and WTI since early August, per CNBC.
“The impact of Hurricane Ida was a lot greater than many anticipated and production in the Gulf of Mexico region might struggle to return until Tropical Storm Nicholas is done punishing the region with torrential rain,” said Edward Moya, senior analyst at OANDA, as quoted on CNBC.
Tropical Storm Nicholas also played its role in boosting oil prices. The storm moved slowly through the Gulf Coast, causing catastrophe. Devastation from the storm just after Hurricane Ida kept considerable amount of Gulf Coast refining capacity offline.
The International Energy Agency (IEA) said on Tuesday vaccine roll-outs would boost a rebound in the energy market. Talks of booster shots are also added advantage for the oil market (read: ETFs to Rise on Full FDA Approval for Pfizer COVID-19 Vaccine).
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 higher drawdown, 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 4.36% 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 (with Fed taper talks), banks now have every reason to cheer.
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.
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.