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ETF Areas to Benefit/Lose as Oil May Hit $100 Soon

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Oil prices increased considerably on Oct 5 as OPEC+ producers agreed on deep output cuts, seeking to spur a recovery in crude prices despite repeated calls from U.S. President Joe Biden’s administration for the group to pump more to lower fuel prices and contain global inflation.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, decided to trim production targets by about two million barrels per day from November. Energy analysts had mostly expected the group to slash production in the range of 500,000-two million barrels, as quoted on CNBC.

United States Oil Fund, LP (USO - Free Report) added 2.4% on Oct 5 just after the OPEC+ decision while United States Brent Oil Fund, LP (BNO - Free Report) added 2.11%. Oil prices have declined around 30% since early June after reaching multi-year highs in March. The fall has been triggered by growing concerns that global (including the United States) interest rate hikes and COVID-related restrictions in parts of China could slow down global economic growth and lower oil demand. The output cut for November is targeted at reversing this decline.

The Fed rate hikes resulted in a higher U.S. dollar. Since most commodities are traded in the U.S. dollar, a rise in it is a headwind to oil prices. Invesco DB US Dollar Index Bullish Fund (UUP - Free Report) has been up 5.5% in the past three months (as of Oct 5, 2022).

Many analysts believe that OPEC+ wants to see oil prices at $100-level. Oil prices might rally back to that level, given no major COVID-19 outbreak globally and a decent price of the greenback. However, occasional lockdowns in China (a major energy user) and continued recession fears might weigh on oil prices occasionally.

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


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 3.77% annually. XLE has a Zacks Rank #1 (Strong Buy).

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

Big banks had 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 the 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 - 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.


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 stations. In fact, not only oil, overall inflation is rising, hurting consumers’ buying power.

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.

Country – iShares India 50 ETF (INDY - Free Report)

India is almost entirely dependent on imports to back its oil needs. An oil price rally could thus be a major deterrent to India investing.

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