Solar ETFs Jump On Budget Deal; Oil Lags

Oil and gas ETFs sagged, while renewable energy ETFs surged after Congressional leaders unveiled a $1.1 billion spending bill that would impact both industries.

The bill, which is likely to pass by the end of the week, averts a dreaded government shutdown like the one that took place for 16 days in 2013, and satisfies key demands made by Democrats and Republicans.

Oil Export Ban To End

One of Republicans’ biggest demands was a lifting of the crude oil export ban that's been in place for 40 years. That ban―a reaction to the Arab oil embargo of the 1970s―is no longer necessary, with U.S. oil production and reserves growing by leaps and bounds in recent years, according to Republicans and the oil industry.

In fact, it's put U.S. oil producers at a disadvantage by keeping prices for domestic crude lower than they would have otherwise been. WTI, the U.S. oil benchmark, has frequently traded at steep discounts to its international counterpart, Brent. At one point in 2011, the discount hit a high of $28/barrel.

However, WTI has slowly clawed its way back up. The average discount in 2015 has been only $4.80 due to increased pipeline capacity, falling production and growing demand.

After the latest news of a deal in Congress, today WTI traded as little as $0.20 below Brent, and some analysts suggest that the U.S. benchmark could soon move into a premium against its counterpart.

WTI-Brent Spread

That bodes well for WTI as a benchmark, but does little to stem the weakness in crude oil prices generally. Both WTI and Brent plunged in 2014 and 2015 due to a global glut; the ending of the oil export ban doesn't change that.

In fact, today WTI is down more than 4% to $35.75, just a hair above the six-year low of $34.53 set on Monday. Energy ETFs such as the Energy Select SPDR (XLE | A-91) are following suit, with losses of more than 1%.

Renewable Energy Subsidies Extended

In exchange for agreeing to the end of the oil export ban, Democrats received support for one of their pet issues: renewable energy subsidies. Tax credits related to wind production and solar investment were extended by five years.

Separately, the California Public Utilities Commission announced Tuesday that it would seek essentially to maintain its current system of fully compensating rooftop solar customers for the electricity they generate but don't use.

The system, called "net metering," may keep the boom in California's solar industry going, with rooftop solar energy expected to account for 5% of California's total generation in 2016, according to the Orange County Register.

The double whammy of good news is putting upside pressure on the biggest solar fund, the Guggenheim Solar ETF (TAN | D-27) today. TAN is up 6%, bringing its weekly gain to nearly 16%.

Meanwhile, the First Trust ISE Global Wind Energy ETF (FAN | D-27) is up a much more modest 1.5% today, while the broader PowerShares WilderHill Clean Energy ETF (PBW | C-15) is up 4.5%.

Longer term, the clean-energy industry faces competition from cheap fossil fuels. Subsidies will help, but improving technologies and lower prices will be necessary to compete with traditional fuels.

Contact Sumit Roy at [email protected].