Energy sector-related exchange traded funds are strengthening as traders turn more bullish and oil prices push higher on a weakening U.S. dollar.
Among the best performing non-leveraged ETFs of Monday, the Invesco S&P SmallCap Energy ETF (NasdaqGM: PSCE) rose 6.2% and the SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) advanced 5.8%. The broader Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, was up 3.6%.
Meanwhile, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, were up 2.4% and 2.0%, respectively. WTI crude oil futures were up 1.8% to $96.4 per barrel, and Brent crude gained 1.7% to $104.9 per barrel.
Crude oil prices strengthened Monday as the U.S. dollar weakened, along with improving risk-on sentiment.
“A slightly weaker U.S. dollar and improving equity markets are supporting oil,” UBS oil analyst Giovanni Staunovo told Reuters.
The energy markets have been under pressure, following heightened fears of an economic recession in response to an overly aggressive Federal Reserve.
“Rising recession fears globally do suggest that gains are likely to be limited in the shorter term, geopolitics aside,” Jeffrey Halley, a senior market analyst at OANDA, also told Reuters.
Looking ahead, market observers are watching western countries’ decision to allow Russian state-owned energy companies to ship crude to more beleaguered emerging economies at an adjusted price to help assuage the fallout from rising global energy prices. However, not all are convinced that this will ease the elevated oil prices.
Continued tight supply follows “expectations that Russian oil supply will edge lower in the months ahead as widely-expected plans for a price cap on Russian oil may have the opposite effect on oil prices than hoped for,” Warren Patterson, head of commodities strategy at ING, told Reuters.
Meanwhile, equity traders may be turning more bullish after cutting back on short bets against the energy sector, notably rolling back bets against XLE, the biggest energy sector-related ETF. Short sellers previously jumped on XLE but have since trimmed exposure, following the recent pullback in the energy sector, Bloomberg reports.
Options traders have closed out positions and have reduced the number of shares shorted by 14% in the past 30 days, according to S3 Partners data.
“ETF short sellers are actively trimming their short exposure — possibly looking for a bottom in the market and removing some of their downside bets,” Ihor Dusaniwsky, S3’s head of predictive analytics, told Bloomberg.
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