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Oil prices have been under pressure lately. The WTI crude ETF (USO - Free Report) and the Brent crude ETF (BNO - Free Report) are down about 10% and 9.5%, respectively, past month. In its monthly report, the Organization of the Petroleum Exporting Countries (OPEC) revised its oil demand growth forecast for 2024, predicting an increase of 2.0 million barrels per day. This is 80,000 barrels less than its previous estimate. The group also slightly adjusted its growth forecast downward for 2025.
China's Economic Headwinds Hurt Oil Demand
One of the main reasons for OPEC's downward revision was China's ongoing economic woes, including a real estate crisis and an inclination for greener energy consumption. The country has increasingly shifted to natural gas, which is both cheaper and cleaner than oil, as part of its energy transition. OPEC’s report highlighted weakened demand for diesel due to slower manufacturing, construction and trucking activities, along with the growing use of liquefied natural gas (LNG) trucks.
Analysts Lower Crude Price Targets Amid Weaker Global Demand
Wall Street analysts have grown more pessimistic about crude prices, largely due to weakened demand from China. The U.S. economy, too, is showing signs of slowing. Economic concerns in the United States and Europe, where the summer driving season has ended, have also contributed to lower price targets. OPEC+ recently delayed the unwinding of voluntary production cuts, which were originally scheduled for October.
Against this backdrop, below-mentioned sector ETFs should lose and win on oil price slump.
Losers
Energy – SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This is the most obvious choice. If oil price is staging a downtrend, oil exploration and production stocks are sure to lose as these companies will tend to pump less oil ahead.
Steel – VanEck Vectors Steel ETF (SLX)
Steel producers are likely to lose if oil prices continue to fall. The industry supplies materials to build and expand oil drilling operations. In the face of massive capex cuts by drillers in the peak of the pandemic, steel companies suffered a lot.
Falling energy prices bode well for retailers as consumers’ wallets get fattened from lower outlays on gas station. This is going to help consumers directly.
Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. After taking crude, refiners transform it to the finished product gasoline. Now, with crude prices falling, refiners may see a higher crack spread and their profitability may be helped.
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 costs of this sector. So, falling crude prices are likely to boost earnings of airline companies.
Low oil prices are a plus for miners. Mining companies’ 50% production costs are closely linked to energy prices. Cheap oil should work wonders for gold miners’ operating margins. Plus, growing risk-off sentiment (which boosts the safe-haven appeal for gold) and the likely Fed rate cut this month will go in favor of the gold miners.
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Sector ETFs to Lose/Win from Lower Oil Prices
Oil prices have been under pressure lately. The WTI crude ETF (USO - Free Report) and the Brent crude ETF (BNO - Free Report) are down about 10% and 9.5%, respectively, past month. In its monthly report, the Organization of the Petroleum Exporting Countries (OPEC) revised its oil demand growth forecast for 2024, predicting an increase of 2.0 million barrels per day. This is 80,000 barrels less than its previous estimate. The group also slightly adjusted its growth forecast downward for 2025.
China's Economic Headwinds Hurt Oil Demand
One of the main reasons for OPEC's downward revision was China's ongoing economic woes, including a real estate crisis and an inclination for greener energy consumption. The country has increasingly shifted to natural gas, which is both cheaper and cleaner than oil, as part of its energy transition. OPEC’s report highlighted weakened demand for diesel due to slower manufacturing, construction and trucking activities, along with the growing use of liquefied natural gas (LNG) trucks.
Analysts Lower Crude Price Targets Amid Weaker Global Demand
Wall Street analysts have grown more pessimistic about crude prices, largely due to weakened demand from China. The U.S. economy, too, is showing signs of slowing. Economic concerns in the United States and Europe, where the summer driving season has ended, have also contributed to lower price targets. OPEC+ recently delayed the unwinding of voluntary production cuts, which were originally scheduled for October.
Against this backdrop, below-mentioned sector ETFs should lose and win on oil price slump.
Losers
Energy – SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)
This is the most obvious choice. If oil price is staging a downtrend, oil exploration and production stocks are sure to lose as these companies will tend to pump less oil ahead.
Steel – VanEck Vectors Steel ETF (SLX)
Steel producers are likely to lose if oil prices continue to fall. The industry supplies materials to build and expand oil drilling operations. In the face of massive capex cuts by drillers in the peak of the pandemic, steel companies suffered a lot.
Gainers
Retail - SPDR S&P Retail ETF (XRT - Free Report)
Falling energy prices bode well for retailers as consumers’ wallets get fattened from lower outlays on gas station. This is going to help consumers directly.
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 taking crude, refiners transform it to the finished product gasoline. Now, with crude prices falling, refiners may see a higher crack spread and their profitability may be helped.
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 costs of this sector. So, falling crude prices are likely to boost earnings of airline companies.
Gold Miners – VanEck Vectors Gold Miners ETF (GDX - Free Report)
Low oil prices are a plus for miners. Mining companies’ 50% production costs are closely linked to energy prices. Cheap oil should work wonders for gold miners’ operating margins. Plus, growing risk-off sentiment (which boosts the safe-haven appeal for gold) and the likely Fed rate cut this month will go in favor of the gold miners.