Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Oil & ETFs: What Investors Need To Know

By Zacks Investment ResearchStock MarketsMar 18, 2020 11:25PM ET
www.investing.com/analysis/oil--etfs-what-investors-need-to-know-200517458
Oil & ETFs: What Investors Need To Know
By Zacks Investment Research   |  Mar 18, 2020 11:25PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The oil industry has been suffering the worst rout in many years. This is especially true as oil price has been in a freefall on a combination of excess supply and shrinking demand. In fact, oil dropped 24% to a more than 18-year low on Mar 18 with U.S. crude dropping below $25 per barrel for the first time. With the latest plunge, oil price is down 60% so far this year.

The coronavirus pandemic has resulted in a slowdown in worldwide travel and business activity that is weighing on oil demand. Additionally, the two powerhouse producers — Saudi Arabia and Russia — are preparing to ramp up production at a time when demand has weakened significantly (read: Global Oil Price War Begins: ETFs in Focus).

A number of analysts have warned about falling oil demand. Goldman said lockdowns to counter the coronavirus pandemic have raised the prospect of the steepest ever annual fall in oil demand. It forecasts oil demand to fall as much as 8-9 million barrels per day by the end of March and 1.1 million barrels per day in 2020. Rystad Energy is even more pessimistic, estimating a demand plunge of 2.8 million barrels per day in 2020 and 11 million barrels per day in April.

However, a wave of emergency moves by central banks against economic fallout from the coronavirus has led to some respite on Mar 19 with oil price bouncing back off their lowest levels. Oil made up for all its loses made in the previous trading session but is still in deep red from the year-to-date look. Even if the banks can provide enough stimulus or coronavirus vaccines becomes success, oil price could remain under pressure as supply remains a concern.

The oil futures market is currently in a state of contango, where later-dated contracts are expensive than near-term contracts, for months. This signals that supply is rising and demand is falling, paving the way for drop in oil price. This trend is likely to persist at least in the near term.

Market Impact

The ultra-popular commodity ETFs that deals directly in the oil futures market saw terrible trading over the past month. United States Oil Fund (NYSE:USO) USO, which seeks to match the performance of the spot price of West Texas Intermediate (WTI or U.S. crude), dropped 58% while United States Brent Oil Fund (ASX:BNO) , which provides direct exposure to Brent crude oil on a daily basis through futures contracts, plunged 53%.

The oil price crash has sent shockwaves across the energy sector, most specifically to American oil firms. The big oil companies like Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) have warned of spending and cost cuttings. Occidental Petroleum (NYSE:OXY) slashed its dividend by 86%. Meanwhile, many smaller oil companies riddled with debt will be forced to lay off workers and consider filing for bankruptcy (read: Oil Firms May Cut Dividends Ahead: ETFs & Stocks in Focus).

As such, the SPDR S&P Oil & Gas Equipment & Services (NYSE:XES) ETF XES, VanEck Vectors Oil Services ETF (CA:OIH) and iShares U.S. Oil Equipment & Services ETF IEZ stole the show over the past month, tumbling nearly 70% each.

While the collapse has hurt the oil producers and explorers, oil refiners have been less affected. This is because the players in this industry use oil as an input for processing refined petroleum products. Hence, lower oil prices expand margins for refiners, leading to rising stock prices. VanEck Vectors Oil Refiners ETF CRAK, which is a one-stop shop for investors to play the oil refining market, is down 45.3% in a month.

Additionally, lower oil price decreased gasoline and jet prices resulting in increased consumer spending, which accounts for more than two-thirds of U.S. economic activity. The discretionary and retail sectors will thus benefit though they have been hurt by store closures and lockdowns due to coronavirus scare. The two popular retail ETFs - VanEck Vectors Retail ETF (TSXV:RTH) and SPDR S&P Retail (NYSE:XRT) ETF XRT shed nearly 22% and 38.5%, respectively in a month.

Apart from these, lower oil price is a boon to oil-consuming nations like India, Turkey and South Africa. After all, lower oil prices make up a big chunk of either tax revenues or GDP growth opportunities (and sometimes both) in big oil importing countries. Additionally, persistent weakness has made oil extremely cheap for the countries that import them. It will lead to an expansion in balance of payments, increase output and reduce inflation in these countries, thereby paving the way for overall economic growth. However, travel bans, and lockdowns have been hampering growth worldwide leading to sell-offs (read: Coronavirus Panic to Send Economy Into Recession: ETF Picks).

iShares India 50 ETF (JK:INDY) , which provides exposure to the largest 50 India stocks by tracking the Nifty 50 Index, lost 34% in a month.

Leveraged Inverse Play

The persistent decline in oil price has resulted in huge demand for leveraged inverse ETFs as these could see huge gains in a very short time frame when compared to the simple products. MicroSectors U.S. Big Oil Index Inverse ETN YGRN and ProShares Short Oil & Gas (HN:DDG) have more than doubled in a month and leading the inverse ETF space (see: all the Inverse Equity ETFs).

The former is an ETN option providing inverse exposure to the Solactive MicroSectors U.S. Big Oil Index while the latter provides inverse exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>



Exxon Mobil Corporation (XOM): Free Stock Analysis Report

Chevron Corporation (CVX): Free Stock Analysis Report

Occidental Petroleum Corporation (OXY): Free Stock Analysis Report

SPDR S&P Retail ETF (XRT): ETF Research Reports

United States Oil ETF (USO): ETF Research Reports

VanEck Vectors Retail ETF (RTH): ETF Research Reports

SPDR S&P Oil & Gas Equipment & Services ETF (XES): ETF Research Reports

United States Brent Oil ETF (BNO): ETF Research Reports

iShares U.S. Oil Equipment & Services ETF (IEZ): ETF Research Reports

VanEck Vectors Oil Services ETF (OIH): ETF Research Reports

VanEck Vectors Oil Refiners ETF (CRAK): ETF Research Reports

iShares India 50 ETF (INDY): ETF Research Reports

ProShares Short Oil & Gas (DDG): ETF Research Reports

MicroSectors U.S. Big Oil Index Inverse ETN (YGRN): ETF Research Reports

Original post

Zacks Investment Research

Oil & ETFs: What Investors Need To Know
 

Related Articles

Gary S. Morrow
Caterpillar Is Cratering By Gary S. Morrow - Jun 11, 2021 3

Caterpillar (NYSE:CAT) is under heavy pressure as the week comes to an end. On Thursday, shares fell 3.8% with the help of a big bump in volume. This damaging breakdown pierced a...

Oil & ETFs: What Investors Need To Know

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email