We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Sector ETFs to Benefit/Lose as Oil May Hit $120 Soon
Read MoreHide Full Article
Oil prices have staged a rally lately with both United States Oil Fund LP (USO - Free Report) and United States Brent Oil Fund LP (BNO - Free Report) adding 13% past month. A host of factors aided the rally. Growing vaccine distribution, economic reopening, tight supplies amid capex constraint and geopolitical tensions both in Middle East and Russia boosted oil prices. Then a freezing weather instigated the oil rally in February as ice is causing troubles to trucking.
The latest boon came in the form of the Russia-Ukraine tensions. Talks about Russia-Ukraine tensions are back this year after 2014. Russia’s Crimea annexation (previously a Ukrainian territory) had then hit headlines thanks to its military move and the resultant standoff with the West as the Crimean maneuver was viewed as an utter violation of international law by the West (read: Expecting an Escalation in Russia-Ukraine Crisis? Play These ETFs).
This year too, the Russia-Ukraine crisis has escalated. Western allies are now preparing for some kind of military hostility. NATO put more forces on standby. The U.S. Department of Defense recently said that about 8,500 American troops are on high alert and will make a move in the region if Russia invades Ukraine. On Sunday, White House national security advisor Jake Sullivan warned that an invasion could come “any day now.”
Oil will definitely hit $120 a barrel and the global economy will be “radically altered” if Russia invades Ukraine, veteran strategist David Roche has predicted, as quoted on CNBC.
Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on rising crude prices as well as the ones that are likely to underperform.
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 3.42% annually. XLE has a Zacks Rank #2 (Buy).
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 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.
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.
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.
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.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Sector ETFs to Benefit/Lose as Oil May Hit $120 Soon
Oil prices have staged a rally lately with both United States Oil Fund LP (USO - Free Report) and United States Brent Oil Fund LP (BNO - Free Report) adding 13% past month. A host of factors aided the rally. Growing vaccine distribution, economic reopening, tight supplies amid capex constraint and geopolitical tensions both in Middle East and Russia boosted oil prices. Then a freezing weather instigated the oil rally in February as ice is causing troubles to trucking.
The latest boon came in the form of the Russia-Ukraine tensions. Talks about Russia-Ukraine tensions are back this year after 2014. Russia’s Crimea annexation (previously a Ukrainian territory) had then hit headlines thanks to its military move and the resultant standoff with the West as the Crimean maneuver was viewed as an utter violation of international law by the West (read: Expecting an Escalation in Russia-Ukraine Crisis? Play These ETFs).
This year too, the Russia-Ukraine crisis has escalated. Western allies are now preparing for some kind of military hostility. NATO put more forces on standby. The U.S. Department of Defense recently said that about 8,500 American troops are on high alert and will make a move in the region if Russia invades Ukraine. On Sunday, White House national security advisor Jake Sullivan warned that an invasion could come “any day now.”
Oil will definitely hit $120 a barrel and the global economy will be “radically altered” if Russia invades Ukraine, veteran strategist David Roche has predicted, as quoted on CNBC.
Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on rising crude prices as well as the ones that are likely to underperform.
Gainers
Energy – Energy Select Sector SPDR Fund XLE)
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 3.42% annually. XLE has a Zacks Rank #2 (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.
Losers
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.