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After a short recovery, oil price resumed its downtrend and plunged to the lowest level at the close on Apr 15 for the first time in two decades. The coronavirus pandemic has taken a toll on the global oil market, resulting in a steep plunge in oil demand and the biggest ever weekly build in domestic crude supplies. Notably, U.S. crude has fallen below $20 per barrel and lost 30% from its Apr 3 high.
The efforts taken by the OPEC and its allies to cut oil production by 9.7 million barrels a day starting on May 1 through Jun 30 to balance the oil market has been unable to lift the sector sentiments. The International Energy Agency (IEA) warned of the lowest oil demand in 25 years, citing lockdown in numerous countries and territories to contain the virus. The agency expects oil demand in April to fall below last year’s average by 29 million barrels per day to levels not seen since 1995. Oil demand is expected to drop 23.1 million barrels per day in the second quarter before a gradual recovery in the second half of the year (read: OPEC Output Deal Cut: Will It Help Oil & Energy ETFs?).
According to the latest report from the Energy Information Administration, domestic crude supplies spiked by a record 19.2 million barrels in the week ended Apr 10. The American Petroleum Institute reported a climb of 13.1 million barrels.
The dual tailwind led to 65% filled crude storage tanks. According to ClipperData Crude, stockpiles are now above 500 million barrels for the first time since June 2017. Additionally, a flight to safety, following weak retail and factory data, has pushed the dollar higher against the basket of currencies. A strength in dollar made dollar-denominated assets expensive for foreign investors, potentially diminishing demand for commodities.
While slump in prices is hurting oil exporting and production companies, it has been a blessing for a few zones, including airlines, retail, consumer discretionary, oil importers and refiners. We have highlighted some ETFs that are expected to benefit/lose from lower oil price:
Airlines are the biggest beneficiaries of lower oil price as fuel accounts for the major portion of their operating expenses. As such, lower oil price will likely boost their profitability, propelling JETS higher. This is the pure play ETF providing exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product has gathered $448.4 million in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Top ETF Stories of First Quarter).
Oil refiners are the only bright spot in the energy space amid declining oil price. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, lower oil prices could result in higher margins for refiners. With AUM of $11.5 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, charging 60 bps in annual fees.
Lower oil prices also bode well for retail sector. XRT tracks the S&P Retail Select Industry Index and charges 35 bps in annual fees. The fund has AUM of $203.4 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 4 Sector ETFs That Were Up About Double Digit on Monday).
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
Lower oil price leads to higher consumer spending, which accounts for more than two-thirds of U.S. economic activity. The consumer discretionary sector will thus see a spike. XLY offers exposure to consumer discretionary stocks by tracking the Consumer Discretionary Select Sector Index. It is the largest and the most popular product in this space with AUM of $11.2 billion and charges 0.13% in expense ratio. The product has a Zacks ETF Rank #2 with a Medium risk outlook.
Lower oil prices are benefiting India the most as it is the world’s third largest importer of crude oil, accounting for two-thirds of crude oil requirements. INDA, the ultra-popular ETF with AUM of $2.8 billion, offers exposure to large and mid-cap companies by tracking the MSCI India Index. It charges 69 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Lower oil price is a bane for energy stocks, especially producers and explorers, who derive most of their revenues from selling the crude that they extract. OIH tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $345.9 million, it charges 35 bps in annual fees from investors. However, the product has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This fund provides exposure to oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $1.7 billion and charges 35 bps in annual fees. The fund has a Zacks ETF Rank #5 with a High risk outlook (read: Will Oil Continue Riding the Trump Mojo? ETFs in Focus).
VanEck Vectors Russia ETF
Key oil producing countries like Russia are losing from the oil price collapse, as the commodity is an important driver of their overall economies. After all, oil revenues make up a big chunk of either tax revenues or GDP growth opportunities (and sometimes both) in these countries. This product offers exposure to the publicly traded companies that are incorporated in Russia or outside but have at least 50% of their revenues/related assets in Russia. It follows the MVIS Russia Index, charging investors 65 bps in annual fees. RSX is popular and liquid with AUM of $913.1 million and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.
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Oil Closes Below $20: ETFs to Gain & Lose
After a short recovery, oil price resumed its downtrend and plunged to the lowest level at the close on Apr 15 for the first time in two decades. The coronavirus pandemic has taken a toll on the global oil market, resulting in a steep plunge in oil demand and the biggest ever weekly build in domestic crude supplies. Notably, U.S. crude has fallen below $20 per barrel and lost 30% from its Apr 3 high.
The efforts taken by the OPEC and its allies to cut oil production by 9.7 million barrels a day starting on May 1 through Jun 30 to balance the oil market has been unable to lift the sector sentiments. The International Energy Agency (IEA) warned of the lowest oil demand in 25 years, citing lockdown in numerous countries and territories to contain the virus. The agency expects oil demand in April to fall below last year’s average by 29 million barrels per day to levels not seen since 1995. Oil demand is expected to drop 23.1 million barrels per day in the second quarter before a gradual recovery in the second half of the year (read: OPEC Output Deal Cut: Will It Help Oil & Energy ETFs?).
According to the latest report from the Energy Information Administration, domestic crude supplies spiked by a record 19.2 million barrels in the week ended Apr 10. The American Petroleum Institute reported a climb of 13.1 million barrels.
The dual tailwind led to 65% filled crude storage tanks. According to ClipperData Crude, stockpiles are now above 500 million barrels for the first time since June 2017. Additionally, a flight to safety, following weak retail and factory data, has pushed the dollar higher against the basket of currencies. A strength in dollar made dollar-denominated assets expensive for foreign investors, potentially diminishing demand for commodities.
While slump in prices is hurting oil exporting and production companies, it has been a blessing for a few zones, including airlines, retail, consumer discretionary, oil importers and refiners. We have highlighted some ETFs that are expected to benefit/lose from lower oil price:
ETFs to Gain
U.S. Global Jets ETF (JETS - Free Report)
Airlines are the biggest beneficiaries of lower oil price as fuel accounts for the major portion of their operating expenses. As such, lower oil price will likely boost their profitability, propelling JETS higher. This is the pure play ETF providing exposure to the global airline industry, including airline operators and manufacturers from all over the world, by tracking the U.S. Global Jets Index. The product has gathered $448.4 million in its asset base while charging investors 60 bps in annual fees. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Top ETF Stories of First Quarter).
VanEck Vectors Oil Refiners ETF (CRAK - Free Report)
Oil refiners are the only bright spot in the energy space amid declining oil price. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, lower oil prices could result in higher margins for refiners. With AUM of $11.5 million, this ETF is a one-stop shop for investors to play the oil refining market. It follows the MVIS Global Oil Refiners Index, charging 60 bps in annual fees.
SPDR S&P Retail ETF (XRT - Free Report)
Lower oil prices also bode well for retail sector. XRT tracks the S&P Retail Select Industry Index and charges 35 bps in annual fees. The fund has AUM of $203.4 million and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: 4 Sector ETFs That Were Up About Double Digit on Monday).
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
Lower oil price leads to higher consumer spending, which accounts for more than two-thirds of U.S. economic activity. The consumer discretionary sector will thus see a spike. XLY offers exposure to consumer discretionary stocks by tracking the Consumer Discretionary Select Sector Index. It is the largest and the most popular product in this space with AUM of $11.2 billion and charges 0.13% in expense ratio. The product has a Zacks ETF Rank #2 with a Medium risk outlook.
iShares MSCI India ETF (INDA - Free Report)
Lower oil prices are benefiting India the most as it is the world’s third largest importer of crude oil, accounting for two-thirds of crude oil requirements. INDA, the ultra-popular ETF with AUM of $2.8 billion, offers exposure to large and mid-cap companies by tracking the MSCI India Index. It charges 69 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
ETFs to Lose
VanEck Vectors Oil Services ETF (OIH - Free Report)
Lower oil price is a bane for energy stocks, especially producers and explorers, who derive most of their revenues from selling the crude that they extract. OIH tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $345.9 million, it charges 35 bps in annual fees from investors. However, the product has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This fund provides exposure to oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $1.7 billion and charges 35 bps in annual fees. The fund has a Zacks ETF Rank #5 with a High risk outlook (read: Will Oil Continue Riding the Trump Mojo? ETFs in Focus).
VanEck Vectors Russia ETF
Key oil producing countries like Russia are losing from the oil price collapse, as the commodity is an important driver of their overall economies. After all, oil revenues make up a big chunk of either tax revenues or GDP growth opportunities (and sometimes both) in these countries. This product offers exposure to the publicly traded companies that are incorporated in Russia or outside but have at least 50% of their revenues/related assets in Russia. It follows the MVIS Russia Index, charging investors 65 bps in annual fees. RSX is popular and liquid with AUM of $913.1 million and has a Zacks ETF Rank #3 (Hold) with a High risk outlook.
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>