What's Driving the Outperformances of Top Energy ETFs?

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1 What's Driving the Outperformances of Top Energy ETFs? By Robert S cott Jun 10, :28 PM How Did Oilfield Services Outperform Other Energy ETFs? The fall of US crude oil On June 9, 2016, US crude oil (USO) (UWTI) closed at $ That s 1.3% lower than its 2016 high of $51.23 on June 8, The EIA (U.S. Energy Information Administration) reported on June 8 that US crude oil stockpiles fell by 3.2 MMbbls (million barrels) in the week ended June 3, This compares to analyst estimates of a 2.7-MMbbl fall in inventories. OIH outperformed other energy ETFs The VanEck Vectors Oil Services ETF (OIH) outperformed other energy ETFs from June 2 9, Below are the other ETFs and their performances: Energy Select Sector SPDR ETF (XLE): rose 3.1% Alerian MLP ETF (AMLP): rose 1.4% SPDR S& P Oil & Gas Exploration & Production ETF (XOP): rose 2.6% VanEck Vectors Oil Services ETF (OIH): rose 10.2% The rise in OIH came after oil rigs rose in the week ended June 3 for the first time in 11 weeks.

2 Historically, XOP has a higher correlation to crude oil compared to other ETFs. XOP tracks crude oil closer than XLE because it has more upstream companies in its portfolio. So XOP s gains are closer to crude oil s gains. From June 2 9, crude oil futures rose 2.8%. That s why XOP fell less than XLE. Below are XOP s upstream energy companies and their weights: Bill Barrett (BBG): 1.2% C ontinental Resources (C LR): 1.4% Triangle P etroleum (TP LM): 1.3% Denbury Resources (DNR): 1.4% In the next part of our series, we ll see why UNG outperformed USO. Why Did UNG Outperform USO? UNG versus USO From June 2 9, 2016, the United States Natural Gas ETF (UNG) outperformed the United States Oil ETF (USO). UNG rose ~8.4%, and USO rose ~3.3%. Why did UNG outperform USO? UNG ended June 9 with a rise of ~5.7% after the EIA (U.S. Energy Information Administration) announced a 65 Bcf (billion cubic feet) addition to natural gas (UNG) (GASL) inventory levels. The consensus forecast was 79 Bcf. Natural gas futures rose 6.0% and closed at $2.62, its highest level for 2016.

3 USO closely tracks crude oil futures. It rose due to bullishness in crude oil (SCO) (UCO) (UWTI) prices. This was driven by supply outages throughout the world. Since June 2, USO has rallied along with crude oil futures. It rose 2.9%, and crude oil futures rose 2.8%. However, after oil touched its 2016 high, it fell on June 9. This also helped UNG outperform USO. Analyzing UNG s performance UNG rose 33.0% from March 3 June 9, During this period, natural oil futures rose 59.6%. On March 3, natural gas futures hit a 17-year low. From June 20, 2014, to date, UNG has fallen about 64.4%. Natural gas futures have fallen 43%. The almost two-year downturn in the energy sector started with the fall in crude oil prices from their peak on June 20, These returns show UNG s low returns compared to those of natural gas futures. This is due to the small losses that UNG suffers when the fund rolls its exposure to active natural gas futures that are priced higher than the expiring futures contracts in the fund. Investors can look at energy ETFs such as the Energy Select Sector SPDR ETF (XLE) and the SPDR S& P Oil & Gas Exploration & Production ETF (XOP) for exposure to the energy sector. These ETFs invest in oil and natural gas weighted stocks rather than taking direct exposure to the underlying commodities. That s the case for USO and UNG. Natural gas weighted stocks that are part of XOP include C omstock Resources (C RK), WP X Energy (WPX), Southwestern Energy (SWN), EXCO Resources (XCO), Ultra Petroleum (UPL), and Antero Resources (AR). Next, let s see why XLE outperformed other SPDR ETFs.

4 The Reason XLE Outperformed Other SPDR ETFs Energy sector versus the market From June 2 9, 2016, the Energy Select Sector SP DR ETF (XLE) outperformed other market sectors. It rose ~3.1%. Let s find out how XLE performed compared to other sector SPDR ETFs. XLE outperformed other SPDR ETFs The rally in crude oil (USO) (USL) (OIIL) this week is due to the decline in crude oil inventories and supply outages around the world. These factors cut supplies that have been weighing on the markets. It helped XLE gain in the last six trading sessions. Other SPDR ETFs The utility (XLU) sector rose the most, followed by XLE. US non-farm payroll data released on June 3, 2016, could delay the timing of the next interest rate hike. This helped utility stocks rally. From June 2 9, 2016, the Financial Select Sector SP DR ETF (XLF) fell the most compared to other SPDR ETFs. It fell 1.7%. The fall started after the US jobs report missed the forecasts on June 3. The rate expectations we already talked about are bearish for financials. The above table shows XLE s performance compared to the ETFs representing other sectors. Oil-weighted stocks C rude oil could close on a positive note this week. Last week, it fell 1.4%. The potential of a continued rise in crude oil prices is an important factor for oil-weighted stocks such as RSP Permian (RSPP), Abraxas Petroleum (AXAS), and Clayton Williams Energy (CWEI). In the next part, we ll see what drove the performances of energy ETFs. Energy ETFs: What Drove Their Performances? Correlation of top energy ETFs with crude oil

5 Let s look now at the top energy ETFs that track oil and natural gas related companies. The Energy Select Sector SP DR ETF (XLE) had the highest correlation of 70.4% with US crude oil (USO) (UWTI) (DWTI) in the trailing month to June 9, Below are the correlations of the top energy ETFs with US crude oil in that period: SPDR S& P Oil & Gas Exploration & Production ETF (XOP): 69.2% Alerian MLP ETF (AMLP): 58.4% VanEck Vectors Oil Services ETF (OIH): 19.0% Over the last three months, XOP had the highest correlation of 69.4% with US crude oil. XLE, AMLP, and OIH had correlations of 69.2%, 63.5%, and 63%, respectively, in that period. Some of XOP s constituents include C ontinental Resources (C LR), RSP P ermian (RSP P), Diamondback Energy (FANG), Halcon Resources (HK), Synergy Resources (SYRG), and Kosmos Energy (KOS). Interestingly, AMLP s correlation with crude oil (OIIL) in the last month fell compared to the last three months. How do top energy ETFs correlate with natural gas? The correlations of AMLP and OIH with natural gas (GASL) (BOIL) also fell significantly over the last month compared to the last three months. But all the ETFs we ve discussed are comparatively more correlated to crude oil than to natural gas. So crude oil is the bigger driver for these energy ETFs than natural gas. The positive correlations mean that a rise in crude oil will drive these ETFs higher. So you should watch the movements in crude oil to understand how these ETFs will perform. For daily coverage on crude oil and natural gas prices, visit Market Realist s Energy and Power page.