Energy sector exchange traded funds were among the worst performers Thursday as heightened trade risks concerns fueled bets of diminished oil demand from a global economic slowdown and updated data revealed rising U.S. crude inventory levels.
Among the hardest hit ETFs, the Invesco S&P SmallCap Energy ETF (NasdaqGM: PSCE) and SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES) plummeted 7.2% while the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund, declined 3.8%.
Meanwhile, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, plunged 5.7% as WTI crude oil futures were 6.0% lower to $57.8 per barrel, moving on pace toward their biggest daily and weekly pullback in six months.
Risk-off sentiment gripped global markets on fears that the escalating trade tensions between China and the U.S. could turn into a prolonged conflict between the two largest economies in the world and drag on the growth outlook.
“Again, we’re seeing the effect of worries about the trade issue on demand,” Gene McGillian, Vice President at Tradition Energy, told Reuters, adding that funds and money managers who had built up long positions are “heading to the exits” as trade concerns dim the demand outlook.
Other factors are also contributing to the lower energy outlook. Eurozone business growth expanded less than expected this month, reflecting a slowing economy in Europe. Additionally, tensions between the U.S. and Iran are diminishing, which may reverse some of the risk premium related to the Iran oil trade.
“The administration seems to be tamping down the president’s rhetoric on Iran,” John Kilduff, a partner at Again Capital, told Reuters.
Further dragging on the energy segment, the Energy Information Administration data released Wednesday revealed a growing U.S. supply glut, with inventories surging by 4.7 million barrels last week to 477 million barrels, the highest total since July 2017, the Wall Street Journal reports.
“The main driver today is the inventory data out of the U.S. and it’s weak across the board showing markets are not tightening,” Giovanni Staunovo, director of UBS Wealth Management’s chief investment office, told the WSJ.
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