As Brent and WTI Converge, Keep an Eye on These ETFs
Last Friday, Brent oil futures, the global benchmark contract, fell below NYMEX-traded West Texas Intermediate for the first time since August 17, 2010.
That was on an intraday basis and Brent ultimately closed at a slight premium to WTI, one that grew Monday as WTI fell more than one percent.
WTI is in the midst of a four-week winning streak, buoyed by last week's favorable inventories data and a string of encouraging U.S. economic data points. That could be a sign oil is due for a near-term pullback, possibly making the PowerShares DB Crude Oil Double Short ETN (NYSE: DTO), an alluring play.
However, history shows that the last time Brent and WTI were nestled this close together, owning oil equities and the ETFs that house them over the next 90 days was an excellent trade. Soaring U.S. oil output at the Bakken, Eagle Ford and Permian Basin shale plays, among others, has helped unlock the supply glut and that is proving to be a boon for refiners, whose shares have recently been under siege after surging earlier this year.
Refiners, enjoying bumper profit margins on export sales, are running their hardest since 2005, drawing down U.S. crude inventories at the fastest rate on record, Reuters reported.
Increased activity and attractive margins for ETFs such as the iShares U.S. Oil & Gas Exploration & Production ETF (NYSE: IEO) and the PowerShares Energy Exploration & Production Portfolio (NYSE: PXE). While there is refiner-specific ETF on the market today, IEO and PXE are credible options due to their larger-than-average weights to refining names.
IEO has four refiners among its top-10 holdings while three refiners are found among PXE's top-eight holdings. When Brent and WTI met back on August 17, 2010, IEO and PXE proceeded to gain 14 percent and 17.3 percent, respectively, over the next 90 days. The two ETFs have gained an average of 1.75 percent over the past five trading days.
More traditional equity-based energy ETFs also performed well during the aforementioned 2010 time frame. The Energy Select SPDR (NYSE: XLE) gained almost 14 percent while the rival Vanguard Energy ETF (NYSE: VDE) gained nearly 15 percent. Those performances make sense because XLE and VDE are heavily allocated to Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX) and Occidental Petroleum (NYSE: OXY).
Those companies have not followed the lead of Marathon Oil (NYSE: MRO) and ConocoPhillips (NYSE: COP) in spinning off their refining operations. Since the refining business is still a revenue driver for Exxon, Chevron and Occidental, those stocks stand to benefit from favorable margins. That trio represents 40.6 percent of VDE's weight and about 36 percent of XLE's weight.
The Guggenheim Equal-Weight S&P 500 Energy ETF (NYSE: RYE) was another solid August-November 2010 play. In fact, RYE slightly outperformed VDE and XLE over that time. No stock receives an allocation north of 2.7 percent in RYE, but the ETF is home to four pure-play refiners along with Exxon, Chevron and Occidental. With just 43 stocks, at least one of every six RYE holdings has some refining exposure.
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