DBO Invesco DB Oil Fund

Oil prices have been a bit rocky to open up 2013, as conflicting data points have tugged the important commodity in both directions. Strong stock prices and a robust consumer have helped to push oil higher in some sessions, while a firm dollar and uncertain data readings from around the globe have been the main catalysts for lower prices.

While oil has been favoring the bull market for much of the second half of April, May isn’t off to as good of a start. Sluggish data from both of the two biggest consumers of oil—the U.S. and China—have pushed oil prices sharply lower (about 3%) to open the month (see The Key to Investing in a Futures Backed ETF).

Weak Data in China

First, Chinese data on the manufacturing front came in rather weak, suggesting to some that the nation is indeed slowing down. The PMI for the country came in at just 50.6, a miss compared to the 50.7 expectation, and lower than the 50.9 from a month ago.

This is important as 50.0 marks the difference between expansion and contraction in the index, suggesting that it is very close to falling into contraction territory. And with expectations of a slowdown increasing, many are growing worried about future oil demand in the country as well.

Closer to Home

Meanwhile in the U.S., data wasn’t much better as the domestic PMI barely beat expectations to finish at 52.1. Furthermore, new order growth slowed suggesting that future months could be weak as well.

Investors also zeroed in on the ADP Employment Report, which finished far below the consensus. In fact, the actual was just 119,000, far short of the 155,000 consensus.

To top off the weakness, crude oil inventories also soared week-over-week, with the figure surging by over 6.7 million barrels in Wednesday’s reading. This puts the stocks of crude oil at their highest level ever, a trend that could continue if demand remains sluggish (see Venezuela: The Next Black Swan for Oil ETFs?).

Impact on Oil and Oil ETFs

All of these factors combined to drag down oil prices in Wednesday’s session, as both of the key demand markets have question marks hanging over their growth outlooks. Unsurprisingly, this carried over into the oil ETF world as well, with a number of top products falling by over 2.5% on the session, including the following funds:

• United States Oil Fund (USO)- down 2.5%
• PowerShares DB Oil Fund (DBO) – down 2.6%
• iPath Crude Oil Total Return ETN (OIL)- down 2.7%

Beyond the actual commodity, ETFs tracking the equity side of the oil industry were also in for a rough session. The broad energy sector did ok—as represented by XLE which lost about 1.3%-- but there was a great deal of weaker trading in the more niche corners of the space.

This was particularly true in the exploration and services corners of the market, as these tend to be more volatile than their integrated peers. Top choices in this segment like XOP for drilling and XES for services led the way on the downside, losing roughly 1.75% each (read Crude Oil ETF Investing 101).

Bottom Line

It was a pretty rough day all around in the energy market, as the data releases led to a slump in oil prices. This pushed oil ETFs lower by about 2.5% on the day, while equity oil funds also had a rough session.

Unfortunately, the outlook isn’t exactly great in the space though, and especially so after the recent round of data releases. Commodities could continue to underperform based on this sluggish view, so investors may want to look elsewhere for exposure—like in the MLP space—until some more positive trends can develop, and give oil ETF investors a better outlook going forward.  

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PWRSH-DB OIL FD (DBO): ETF Research Reports
 
IPATH-GS CRUDE (OIL): ETF Research Reports
 
US-OIL FUND LP (USO): ETF Research Reports
 
SPDR-SP O&G EQP (XES): ETF Research Reports
 
SPDR-EGY SELS (XLE): ETF Research Reports
 
SPDR-SP O&G EXP (XOP): ETF Research Reports
 
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