Oil prices rose in early Thursday trading, bouncing back from the previous session's losses. The rebound was driven by stronger-than-expected economic indicators from major oil-consuming nations and signs of easing global trade tensions.
U.S. Crude Stocks See Sharp Decline
According to the Energy Information Administration (EIA), U.S. crude oil inventories fell by 3.9 million barrels to 422.2 million last week. This drop was significantly larger than the projected 552,000-barrel draw, indicating robust refinery operations, tighter supply conditions and heightened demand.
Despite the positive movement in crude prices, gains were tempered by unexpected increases in gasoline and diesel inventories, indicating supply overhangs in refined products.
Mixed U.S. Economic Outlook
The U.S. Federal Reserve’s latest economic snapshot revealed a modest pickup in economic activity in recent weeks. However, the broader outlook was “neutral to slightly pessimistic,” with businesses highlighting the inflationary impact of higher import tariffs.
China’s Oil Demand Signals Resilience
Chinese economic data showed slowing second-quarter growth, but not as severely as anticipated. This was partly due to accelerated activity aimed at getting ahead of U.S. tariff implementations. Importantly, China’s crude oil processing in June rose 8.5% year on year, signaling strong fuel demand.
Outlook for Global Trade Deals
President Trump also expressed renewed optimism for resolving trade disputes with several major partners. He hinted at progress in negotiations with China over illicit drugs, suggested that a trade agreement with India is imminent, and noted a possible deal with Europe.
Risks From Tariff-Driven Slowdowns
While easing tensions have boosted investor confidence, continued uncertainty around global trade policies remains a risk. Prolonged tariff disputes could undermine economic growth and reduce fuel demand, which would exert downward pressure on oil prices.
Sector ETFs in Focus
Against this backdrop, the below-mentioned sector-based exchange-traded funds (ETFs) should lose and win on an oil price rebound.
Gainers
Energy – SPDR S&P Oil & Gas Exploration & Production ETF XOP
This is the most obvious choice. If oil prices stage an uptrend, oil exploration and production stocks are sure to gain as these companies will tend to pump more oil ahead.
Steel – VanEck Vectors Steel ETF SLX
Steel producers are likely to gain if oil prices continue to rise. The industry supplies materials to build and expand oil drilling operations. In the face of massive capex cuts by drillers in the peak of the COVID-19 pandemic, steel companies suffered a lot.
Losers
Retail - SPDR S&P Retail ETF XRT
Rising energy prices do not favor retailers as consumers’ wallets get squeezed from higher outlays on gas station. This will hurt consumers directly.
Oil Refiners – VanEck Vectors Oil Refiners ETF CRAK
Companies in the refining segment incur losses due to higher oil prices as crude is one of their main input costs. After taking crude, refiners transform it into the finished product gasoline. Now, with crude prices rising, refiners may see a lower crack spread and their profitability may be squeezed.
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 costs in this sector. So, falling crude prices are likely to boost the earnings of airline companies. The opposite scenario spells trouble for the space.
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. Hence, costly oil is likely to go against gold miners’ operating margins.
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SPDR S&P Retail ETF (XRT): ETF Research Reports VanEck Steel ETF (SLX): ETF Research Reports VanEck Gold Miners ETF (GDX): ETF Research Reports SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ETF Research Reports U.S. Global Jets ETF (JETS): ETF Research Reports VanEck Oil Refiners ETF (CRAK): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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