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Will Thanksgiving Help Oil & Energy ETFs Despite Covid Fears?

The rally in energy prices has been wavering of late, thanks to resurging COVID-19 cases and the resultant lockdowns, mainly in Europe, which could soon spread to the other parts of the world. Demand worries led to the oil price slump for four weeks in a row last week, for first time since Mar 20. Prices dropped to a six-week low at the end of last week. Austria entered full lockdown from this week. Meanwhile, Crude Oil Jan 22 (CL=F) is trading at around $76.03 level at the time of writing.

Notably, oil prices had made a comeback this year on widespread vaccination, the influx of more antiviral therapies and the resultant economic reopening. WTI Crude ETF United States Oil Fund, LP USO has advanced 69.9% this year, which dropped more than 4% last week and 6.3% in the past month. This puts the spotlight on the likes of Oil & Gas Exploration & Production ETF XLE, Vanguard Energy ETF VDE and SPDR S&P Oil & Gas Exploration & Production ETF XOP.

The trio are up 55%, 59.5% and 79.9% this year but fell 1.4%, 1.6% and 3.4% last week. Despite the recent weakness, the U.S. oil group is still up about 55% for 2021. These are way higher than the S&P 500’s YTD return of about 25%.

But then, The American Automobile Association (AAA) expects roadways and airports to be more crowded this Thanksgiving. Hence, while renewed COVID-19 fears may weigh on the oil rally, higher travel demand in the Thanksgiving week may offer the commodity a relief.

What Lies Ahead?

“The market still remains fundamentally in a good position but lockdowns are now an obvious risk to this if other countries follow Austria’s lead,” said Craig Erlam, senior market analyst at Oanda, as quoted on CNBC. “A move below $80 could deepen the correction, perhaps pulling the price back towards the mid-$70 region,” he added. Oil prices are unlikely to hit $100 a barrel, says S&P Global Platts, as quoted on CNBC. Supply is still growing, per S&P Global Platts.

Output cut compliance is strong in OPEC+ group, pointing to stressed supplies. The data showed that compliance of OPEC members participating in the OPEC + coalition grew from 115% in September to 121% in October, the highest level since May.

This implies suppressed oil supplies in the coming days, especially with the pandemic showing signs of worsening. This month, OPEC cut its global oil demand forecast for the fourth quarter by 330,000 barrels per day from last month’s estimate, as high energy prices are weighing on economic recovery.

Meanwhile, the national average for a gallon of gas stood around a seven-year high of $3.41 on Friday, according to AAA, up from $3.34 one month ago and $2.12 last year, per a CNBC article. In a nutshell, U.S. production is likely to bounce ahead. Analysts expect the Biden administration to go for the Strategic Petroleum Reserve to lower the burden of higher oil prices on consumers.

Oil Rally to Halt Despite Still Cheaper Valuation?

We expect the adverse COVID-19 developments to keep prices in check in the short term. However, over the long term, oil prices have the potential to soar higher. The Energy Select Sector SPDR Fund currently has a forecasted P/E ratio of 14.79X versus three years’ P/E of 16.64X. Such valuation may not overcome the renewed COVID-19 fears in the near term.

Any Silver Lining?

Moderna’s MRNA booster shot news could ramp up reopening trade all over again. There is an encouraging development related to the COVID-19 vaccines. The FDA has broadened the emergency use authorization (EUA) approval of Moderna’s COVID-19 vaccine booster shot at the 50 µg dose level to adults aged 18 and above.

Plus, the demand for Thanksgiving travel may give oil a short-term boost. So, one can expect oil to trade sideways in the near future. All will depend on the volley of news related to the virus, economic opening and inflation.


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Moderna, Inc. (MRNA): Free Stock Analysis Report
 
Energy Select Sector SPDR ETF (XLE): ETF Research Reports
 
United States Oil ETF (USO): ETF Research Reports
 
SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ETF Research Reports
 
Vanguard Energy ETF (VDE): ETF Research Reports
 
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