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Oil Slumps More Than 20% From Recent High: ETFs to Win/Lose

After hitting massive highs early this month, oil recently slumped on a number of factors, including chances of a negotiation between Russia and Ukraine, OPEC’s plan to boost production in the coming days and rising COVID-19 cases in China.

China is dealing with the worst COVID outbreak since 2020. Recent outbreaks in 28 provinces have infected more than 15,000 people. People are apparently hit by the highly transmissible omicron variant, China’s National Health Commission said Tuesday, according to state media, as quoted on CNBC.

Crude oil futures for April 2022 declined about 21.6% (at the time of writing) from its recent previous high. Against this backdrop, it would be prudent to discuss sector ETFs that tend to gain on a slump in crude prices as well as the ones that are likely to underperform.

Gainers

Airlines - U.S. Global Jets ETF JETS

The airline sector 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, falling crude prices are likely to boost profits and earnings of airline companies.

Oil Refiners – VanEck Vectors Oil Refiners ETF CRAK

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 falling, refiners may see a higher crack spread and their profitability may be inflated.

Gold Miners– VanEck Vectors Gold Miners ETF (GDX)

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. In any case, gold will be in high demand due to its safe-haven status amid the resurgence of uncertainties in the stock market (thanks to rising inflation, Fed policy tightening and the Russia-Ukraine war).

Retail - SPDR S&P Retail ETF (XRT)

Rising energy prices do not bode well for retailers as consumers’ wallets get squeezed from higher outlays on gas station. As inflationary pressure has already started to bother consumers, the latest dip in crude prices has come as a nice surprise to consumers. They will likely splurge on discretionary activities fearlessly, thus benefiting retailers.

Losers

Oil Explorers – Energy Select Sector SPDR Fund (XLE)

This is the most obvious choice. If oil price stages a downtrend on higher supplies, oil exploration and production stocks are sure to suffer as they are aflush with inventories.

Steel – VanEck Vectors Steel ETF SLX

Steel producers underperform if oil prices crater. The industry supplies materials to build and expand oil drilling operations. Since an oil price decline can result in subdued capital expenditure by drillers, steel stocks should suffer.

Clean Energy – iShares Global Clean Energy ETF (ICLN)

Clean energy stocks have risen a lot amid the latest oil rally as the former is cheaper energy alternative. Now with oil prices slipping, clean energy stocks may not find enough tailwinds to rally higher.

Financials – SPDR S&P Bank ETF (KBE)

If oil prices suffer a lot, there is the likelihood of a rise in delinquency rates from energy companies. Though we do not think the situation is that grave this time and the Fed policy tightening would favor financial stocks, investors should still keep a watch on the banking ETFs.


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VanEck Steel ETF (SLX): ETF Research Reports
 
ICL Group Ltd (ICL): Free Stock Analysis Report
 
U.S. Global Jets ETF (JETS): ETF Research Reports
 
VanEck Oil Refiners ETF (CRAK): ETF Research Reports
 
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