Oil Rebound Not So Simple to Play

After dropping to $26.20/barrel on February 11, domestic crude oil prices staged a substantial comeback over the following month to reach nearly $41.50/barrel for a trough-to-peak gain of over 58%. While prices have since pulled back (see chart below) volatile oil prices may be tempting to play through exchange-traded products (ETPs). Given the two types (equity-based, like Energy Select SPDR and crude oil futures-based, like US Oil) neither is a perfect fit to track spot oil prices. Due to the effects of contango (where the future spot price is below the current spot price) USO has severely underperformed quoted oil prices this year—it’s down 18% while oil is down just 8%. Investors in XLE have not only enjoyed better performance (up 1%) but also lower price volatility than spot oil. However, $40 oil is still a challenge for oil producers to profit from and flows by investors give us some sense of their skepticism: over the past six weeks XLE has seen outflows of $185 million, including a $125 million outflow this week.