Oil Under $80: Here's What It Means For ETFs

November 05, 2014

With oil lower than it's been in years, there are some pockets of opportunity for investors.

In case you've been under a rock, the price of front-month West Texas Crude oil is currently just over $77. The last time it was at this level was in the summer of 2010, and it was at the same levels all the way back in 2007. The recent drop has been rapid and, short of a crisis like 2008, nearly unprecedented.

Most investors don't invest directly in oil, although ETFs like the United States Oil fund (USO | A-70) have certainly made it easier than ever before. Instead, most of us get our commodity exposure indirectly, through the equities we hold. Assuming this down-draft in oil isn't temporary, it's logical to ask who the winners and losers are in this new era of cheap oil.

Exploration & Production Punished

The knee-jerk response from most investors would be "cheap oil is bad for oil companies," and of course, there's some truth to that. Consider how the biggest energy ETFs with direct exposure to oil exploration and production companies, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP | A-46) and the Energy Select SPDR (XLE | A-96), have fared:


While neither fund is as bad off as front-month crude has been (down 21 percent), XOP is down a whopping 16.6 percent for the year so far, driven by the shockingly bad performance of many of the smaller holdings in the fund. For instance, Energy XXI Bermuda, which has generally been about 1 percent of XOP by weight, is down almost 73 percent this year. A huge swath of exploration firms are down more than 30 percent on the year.


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