The relief of above-$40 oil, felt in mid March, was short-lived as oil has returned to the declining trail once again. Yes, the possibility of a rebalancing of the oil market in the wake of the potential output freeze deal by major producers spread optimism in the oil patch, but the double whammy of a strong dollar and booming U.S. oil production poured cold water on investors' hopes.
The U.S. Energy Information Administration's (EIA) recent release shows that U.S. crude supplies grew more than expected. As per EIA, crude oil inventories increased by 9.4 million barrels in the week ended March 18, surpassing market analysts' expectation of a rise of 3.0 million barrels. This took the total U.S. crude pileup to an all-time high of 532.5 million barrels as of the said week, stoking fears of a further supply glut.
Meanwhile, the U.S. dollar also gained strength as Fed rate hike talks were back on the table. The PowerShares DB US Dollar Bullish ETF (NYSEARCA:UUP) added over 1.3% in the last five trading sessions (as of March 24, 2016). A surging greenback weighed on most commodities including the black gold.
On the whole, oil ETFs including The United States Oil ETF (NYSEARCA:USO) and The United States Brent Oil ETF (NYSEARCA:BNO) lost about 4.5% and 3.6% respectively in the last five trading days (as of March 24, 2016). According to several analysts like Anthony Starkey, energy analysis manager at analytics firm Bentek Energy, "we are oversupplied. This price rally feels a little bit premature."
While the slump in oil prices is definitely hitting oil exporting nations and several oil companies, lower oil prices usually help out companies either by cutting input costs or by raising consumer spending or even in both ways. Below we have highlighted three sector ETFs that should thrive on low oil prices.
Transportation - iShares Transportation Average ETF (BATS:IYT)
Energy cost is the major cost for transportation companies. Airlines, shipment and rail companies need to use oil to produce energy and run their businesses. For example, the profit outlook of airline stocks depends largely on fuel prices, the major variable component in the industry. As a result, a drop in oil prices can boost the margins of transportation stocks and the related ETFs. Also, stepped-up activity thanks to a steadily improving U.S. economy favors this ETF.
The fund was down just 0.2% in the last five days (as of March 24, 2016). From a sector perspective, air freight & logistics takes the top spot with about 30% share, while airlines (22.23%), railroads (21.3%) and trucking (18.7%) round off to the top four spots of the fund.
Consumer Discretionary - SPDR S&P Retail ETF (NYSEARCA:XRT)
Consumer spending is largely related to energy prices. Higher energy bills related to cars and other home appliances normally restrict consumer spending and squeeze their discretionary purchases. Thus, with a substantial plunge in oil prices, consumers will be able to pour their money into discretionary items. The fund has a Zacks ETF Rank #1 (Strong Buy) and was down 1.2% in the last five trading days (as of March 24, 2016).
Oil Refiners - Market Vectors Oil Refiners ETF (NYSEARCA:CRAK)
A crude price slump may be detrimental to the energy sector at large, but it leaves one corner safe, i.e., oil refinery. Companies in the refining industry benefit from lower oil prices as crude is one of their main input costs. They first source this crude and convert it into refined products. Since the prices of gasoline, jet fuel and the likes are relatively higher than crude, refiners get to profit out of this spread.
Investors can play this industry by CRAK, a pure-play exposure to global oil refiners. However, with more than half of its assets invested in non-U.S. companies, the product has high foreign exchange risk. The U.S. has just 33.8% exposure in the fund. CRAK lost just 0.8% in the last five trading sessions (as of March 24, 2016).