Crude oil prices are up as tensions rise amid the ongoing escalation of the Iran-Israel conflict, but the biggest U.S. energy ETF has not budged much.
The State Street Energy Select Sector SPDR ETF (NYSE:XLE) has gained only around 1% since the Iran-Israel tensions began, even as oil prices rose amid concerns about potential disruptions to crude oil supplies in the Middle East, where a third of the world’s crude oil is produced.
The muted move highlights a familiar dynamic in energy markets: oil prices can spike quickly during geopolitical shocks, while energy equities often react more cautiously. The lackluster performance can be explained in several ways.
Why Energy Stocks May Be Lagging Oil
Unlike other oil and gas companies, Exxon Mobil Corp (NYSE:XOM) and Chevron Corp (NYSE:CVX) generate revenue from a variety of businesses and do not entirely depend on the price of crude oil, including refining, chemicals and trading. This could be the reason why the ETF has not budged much despite the recent increase in crude oil prices.
Another possible explanation is how investors perceive oil rallies amid geopolitical developments. Traditionally, investors have viewed oil rallies amid geopolitical developments as a "risk premium." This is because, in geopolitics, oil prices tend to increase suddenly due to conflicts in certain areas, and investors are unsure whether the disruptions will actually materialize.
If investors believe the surge in crude is short-lived, they may be less willing to chase energy equities higher, which is what the market is pricing in.
The ETF’s structure may also explain the way the shares are moving. This is because the top 10 holdings represent more than three-quarters of the fund's portfolio, meaning that the movement of a few mega-cap companies may significantly affect the movement of the shares. In this regard, energy companies have not rallied as the oil price surge would have implied.
In contrast, energy funds that are exposed to exploration and production companies, which are generally more affected by commodity prices, may react significantly to oil market volatility.
For now, the split is simply part of a bigger debate that investors are grappling with: whether oil price rallies signal a long-term shift in energy markets or are just another short-term geopolitical shock.
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This article Oil Surges On Iran-Israel Tensions — So Why Is XLE ETF Barely Moving? originally appeared on Benzinga.com
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