The year 2020 has been a hard one for oil, with the commodity losing around 80% so far. Despite the biggest OPEC+ output cut deal in mid-April, May West Texas Intermediate (WTI) crude futures plunged below zero for the first time in history on Apr 20. After a brief period of rebound, oil prices have started to decline again due to concerns over storage capacity. In fact, oil prices declined nearly 25% on Apr 27.
Oil markets have been struggling with drying demand due to coronavirus-induced shutdowns, still-ample supplies and most importantly, storage crisis. The current storage crisis seems so critical that the U.S. producers are now delivering crude to the nation’s emergency stockpile, per a Bloomberg report.
Oil prices also suffered in March on a price war between Saudi Arabia and Russia. OPEC+ producers’ inability to crack an output cut deal and Saudi Arabia’s announcement that it will pump more oil sparked the war.
Fearing the moving of near-term contracts into the negative territory again, S&P Dow (NYSE:DOW) Jones has announced plans to roll all of its WTI contracts for June into July on Apr 28, per a Bloomberg article. United States Oil Fund (NYSE:USO) LP USO is also selling all of its WTI June contracts and will allocate roughly 30% of its portfolio in July contracts, 15% in August, 15% in September, 15% in October, 15% in December and 10% in June 2021, per a Bloomberg article. According to Cailin Birch, global economist at The Economist Intelligence Unit (NYSE:UNT), “the move [by the USO] is a recognition of the bleak prospects for the US oil sector in May and June,” per a CNBC article.
Against this backdrop, let’s take a look at ETF areas that can gain from the plunging oil prices:
Consumer Discretionary ETFs
Lower oil prices mean more savings on fuel costs for the consumers. Meanwhile, consumers are most likely to spend the additional savings on entertainment, travel and other luxury needs. Fewmost popular ETFs that target the broader consumer discretionary sector and can benefit from the drop in oil prices are Consumer Discretionary Select Sector SPDR Fund XLY, Vanguard Consumer Discretionary ETF VCR and Fidelity MSCI (NYSE:MSCI) Consumer Discretionary Index ETF FDIS (read: ETFs at Risk as U.S. Consumer Sentiment Sees a Steep Decline).
Transportation ETFs
Transportation sector mostly benefits from persisting low crude prices. This is because low oil prices not only result in cost savings but also boost consumer spending and in turn global trade. This is why it makes sense to invest in transportation ETFs like iShares Transportation Average ETF IYT and SPDR S&P Transportation (NYSE:XTN) ETF XTN (read: FedEx (NYSE:FDX) Earnings Put Transport ETFs in Focus).
Airline ETFs
Generally, airline industry is the biggest gainer from plunging oil prices as they incur significant expenses on fuel. Although the airline industry is struggling with sluggish demand and travel bans due to the coronavirus crisis, the low fuel costs should provide some support. Moreover, as economies have begun to reopen in phases, the airline sector will be able to cash in on the oil price plunge. Therefore, U.S. Global Jets ETF JETS looks like an attractive investment option at the moment.
Oil Refiners ETFs
Oil refiners use oil as an input for processing refined petroleum products. Therefore, declining oil prices could result in higher margins for players in the space. In such a scenario, to make the most of the opportunity, investors can opt for the VanEck Vectors Oil Refiners ETF CRAK fund (read: 4 Energy ETF (NYSE:XLE) Areas Better Positioned Amid Negative Oil).
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United States Oil ETF (USO): ETF Research Reports
iShares Transportation Average ETF (IYT): ETF Research Reports
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
U.S. Global Jets ETF (JETS): ETF Research Reports
Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
VanEck Vectors Oil Refiners ETF (CRAK): ETF Research Reports
SPDR S&P Transportation ETF (XTN): ETF Research Reports
Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports
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