Energy ETFs Jump on Stimulus Hopes, Improving Fundamentals

Energy markets and related exchange traded funds jumped Monday as hopes for another coronavirus economic stimulus package, improving Chinese factory data and rising oil demand fueled optimism in crude.

Among the best-performing non-leveraged ETFs of Monday, the VanEck Vectors Oil Services ETF (NYSEArca: OIH) rose 5.3% and SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) increased 4.3% while the broader Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF, was 2.6% higher.

Meanwhile, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, was up 0.8% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, gained 0.6% as WTI crude oil futures rose to $42.1 per barrel and Brent crude advanced to $45.1 per barrel.

After stimulus talks between Democrats and members of Republican Trump’s administration broke down last week, crude oil prices strengthened Monday on signs that House Speaker Nancy Pelosi and Senator Chuck Schumer wanted to meet with the White House to make a deal on the next tranche in Covid-19 economic relief, Reuters reports.

“The oil complex is heavily reliant on that aid. We need people to be able to boost economic activity to spur demand,” John Kilduff, partner at Again Capital, told Reuters.

Further bolstering the oil markets, Saudi Arabian Aramco CEO Amin Nasser projected oil demand rebounding in Asia as economies gradually open up.

Adding on to that improving Asia demand outlook, China’s factory deflation showed signs of easing in July as industrial activity strengthened to pre-pandemic levels.

“With oil demand still slowly grinding higher, and oil supply in check due to the OPEC+ production cut deal and prices too low to incentivize strong production growth in the United States, the oil market remains undersupplied,” UBS analyst Giovanni Staunovo told Reuters.

On the supply side, Iraq said it would cut output by a further 400,000 barrels per day in August and September to compensate for overproduction in the past three months in a bid to comply with its share of cuts set out by the Organization of Petroleum Exporting Countries and its allies, or OPEC+.

“This would send out a strong signal to the oil market on various levels. That said, this would also require the international companies operating in Iraq to join in with the cuts,” Commerzbank analyst Eugen Weinberg told Reuters.

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