Oil prices may have recovered slightly on Thursday, but they were unable to fully bounce back from the 9% decline of the previous three days, as concerns over demand from major consumers outweighed signals that the U.S. may pause its interest rate increases. This week's price plunge has been driven by weak manufacturing growth in China, the world's largest oil importer.
Moreover, the United States raising interest rates to their highest since 2007, which threatens future economic growth there. Investors are also awaiting developments from the European Central Bank (ECB), which is set to raise interest rates for the seventh meeting in a row on Thursday. Chances are high that the ECB will enact smaller rate hike due to softer inflation data.
However, positive growth in the U.S. services sector and expectations of output cuts by major producers have buoyed investors and analysts. OPEC+ began voluntary output cuts of 1.16 million barrels per day at the start of May, which is expected to support the market going into the summer peak demand period.
Retail - SPDR S&P Retail ETF (XRT)
As energy prices decline, retailers stand to benefit as consumers have more disposable income due to lower spending at gas stations. This reduction in oil prices is also expected to lead to a decrease in overall inflation, further increasing consumers' purchasing power. The Fed will also likely pause their interest rate hikes. This decline in interest rates could further enhance consumers' spending capacity on non-essential items.
Oil Refiners – VanEck Vectors Oil Refiners ETF (CRAK)
Refining companies stand to gain from the decline in oil prices, as crude is a major input cost for them. Refiners purchase crude and convert it into finished products such as gasoline. With the recent decrease in crude prices, refiners may experience an increase in their crack spread, which could ultimately boost their profitability.
Airlines - U.S. Global Jets ETF (JETS)
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, falling crude prices are likely to boost earnings of airline companies.
Energy – Energy Select Sector SPDR Fund (XLE)
This is the most obvious choice. If oil price is staging a decline on demand concerns (due to recessionary worries), oil exploration and production stocks are sure to lose.
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 less capital expenditure by drillers, steel stocks should underperform.
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