Oil ETFs Are Back in Black

Just a few days into the first trading week of September and most major asset types, including stocks, bonds and gold, are all down in price, while oil ETFs are bubbling up along with renewed inflation concerns. 

The price of oil jumped to a 10-month high Tuesday and continued climbing Wednesday, following news that Saudi Arabia would extend its planned production cuts through December. Russia also reduced its exports by 300,000 barrels per day through year-end. 

Crude oil’s ascent didn’t just start this week; oil is up nearly 30% in the past two months of trading. 

Higher oil prices compound the concern over higher-for-longer inflation and interest rates, which tends to place downward pressure on broad market stock and bond exchange-traded funds like SPDR S&P 500 ETF Trust (SPY) and iShares Core U.S. Aggregate Bond ETF (AGG), respectively. 

Oil ETFs and Inflation on the Rise 

Oil ETFs, like United States Oil Fund LP (USO), are responding positively to higher oil prices, whereas oil and gas ETFs and broader energy sector funds, like Energy Select Sector SPDR ETF (XLE), are flat to negative. That’s because higher oil prices can lead to increased costs and decreased profits for energy companies. 

The rise in oil prices not only lifts the prices for oil ETFs but it also heats up the concern over higher inflation, because more expensive crude generally leads to higher energy costs for households. Elevated oil also increases production and transportation costs for many businesses, which may pass some of these costs on to consumers. 

Higher Oil as a Tipping Point to Slower Spending? 

An important consideration in the mix of higher oil and inflation is how higher oil prices lead to higher gas prices at the pump, which acts like a tax on the consumer. If consumers, which represent two-thirds of the U.S. economy, decide to cut costs elsewhere in their budgets to absorb the cost of higher gas, 2023’s consumer-led growth could begin to slow. 

Although it’s too soon to know, we may be seeing the beginning of a tipping point toward demand destruction and a decline in consumer spending.