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Oil ETFs Withstand OPEC Cut

OPEC’s politically risky move to cut crude output this month didn’t affect oil prices much: Since the Oct. 5 announcement, benchmark West Texas Intermediate prices have slipped a little more than 4%.

 

 

WTI Oil Price

 


Still, in addition to doubts about whether cuts will cause much oil to actually come off the market, worries are growing about the health of the global economy.

OPEC may actually reduce its output by 0.4 million to 0.6 million barrels per day, Goldman Sachs’ analysts say, while Saudi energy minister Prince Abdulaziz bin Salman estimated that output will drop by 1 million barrels per day.

When it comes to oil prices and oil ETFs, the bigger issue may be whether or not the global economy falls into a recession. A decline in oil demand from a deep economic downturn would easily outweigh any modest production cuts from OPEC.

There are also questions about whether the U.S. will retaliate against OPEC, due to the appearance that it worked with Russia to undermine America’s interests in Ukraine. Russia is a member of the expanded group OPEC+ and it benefits from higher oil prices.

Support for the “NOPEC” bill is growing in the U.S. If passed, OPEC countries would be sued under U.S. antitrust law. This may lead to the cartel’s dismantling and a short-term spike in production as the group floods the market with the oil it’s holding.

Holding Pattern 

For now, oil is in a relatively stable holding pattern as it weighs the crosscurrents of OPEC cuts and Russian supply disruptions on one hand, and macro factors, including a slowdown in China, on the other.

On a year-to-date basis, WTI is up 11%, a good gain considering the economic environment. Still, it’s less than the more –than 60% return at its 2022 peak.

The United States Oil Fund (USO), which tracks oil futures, is up more—almost 28%—thanks to the extra returns it’s received from rolling its contracts from one month to the next within a backwardated future curve.

 

YTD Returns for WTI, USO

 


 
Energy equity ETFs have taken full advantage of the bullish oil market this year.

On a year-to-date basis, the Energy Select Sector SPDR Fund (XLE) has gained 48%, an admirable return in any year, and even more impressive when considering that the next-best-performing sector fund within the SPDR suite, the Consumer Staples Select Sector SPDR Fund (XLP), is down 10%.

XLE has done so well this year that it’s now neck-and-neck with the broader S&P 500 on a five-year return basis, with both up around 55%.

To put that in perspective, at the end of last year, the SPDR S&P 500 ETF Trust (SPY) had more than doubled in price over the previous five years, while XLE was down 6%. Talk about closing the gap!

 

Five-Year Returns for the S&P 500 & XLE

 

 

Follow Sumit Roy on Twitter @sumitroy2

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