One of the worst performing asset classes during the past few years is making a major comeback. Since the beginning of the year, a resurgence in prices of copper, oil and gas has been underway and given a boost to the commodities complex. And ETFs linked to these groups have benefitted from this reversal.
For two consecutive months, national gasoline prices have increased and pushed up energy focused funds.
The United States Gasoline Fund (UGA), which tracks gasoline futures contracts on the NYMEX, has surged 38 percent since the start of the year. Similarly, the Invesco DB Energy Fund (DBE) has jumped almost 23 percent. DBE uses a blended approach by owning multiple energy contracts including light sweet crude oil, heating oil, Brent crude oil, RBOB gasoline and natural gas.
Tactical traders are embracing the bullish rebound in the once-beleaguered energy group, as witnessed by stellar results among certain leveraged ETFs in this space. The Direxion Daily Energy Bull 3x Shares (ERX), for example, has zoomed nearly 60 percent higher this year while the United States 3x Oil Fund (USOU) has surged more than 141 percent. ERX aims for triple daily leverage to energy stocks, while USOU aims for the same daily goal but on West Texas Intermediate light sweet crude oil.
A confluence of factors are driving fuel prices higher including weather, delivery disruptions and seasonal maintenance occurring at oil refineries.
Midwest flooding caused billions of dollars in crop damage and cut around 13 percent of ethanol capacity. It also shut down rail lines serving as the main point for delivering corn and ethanol. Ethanol, which is made from corn, is blended into gasoline to reduce air pollution as required by the U.S. government.
Equity funds linked to the oil and gas sector have delivered strong year-to-date results, too.
The SPDR S&P Oil and Gas Exploration and Production ETF (XOP) has jumped 22.7 percent and the Energy Select Sector SPDR ETF (XLE) has risen 18.7 percent. While XOP owns smaller energy producers, XLE has exposure to the familiar blue chips including Exxon Mobil, Chevron, and ConocoPhillips. Stocks in the energy sector represent 5.5 percent of the overall S&P 500.
Despite the uptick in gasoline prices, some economists are predicting a modest decline. On April 9, the U.S. Energy Information Administration forecasted the national average for gasoline prices from April through September will be $2.76 a gallon, down slightly compared to $2.85 last summer. The agency projects the average American household will spend $100 less on fuel this year, notching a 4 percent savings.
Although the bullish run-up in energy ETFs may not be over yet, a pause and/or some consolidation is likely ahead.
Slowing economies could shape energy’s future, as the International Monetary Fund has downgraded its global economic growth forecasts. If fuel consumption takes a hit due to this or other events, then energy bears might return from hibernation.
Ron DeLegge is founder and chief portfolio strategist at ETFguide.