Betting on a bailout, investors rush into U.S. energy funds

By Claire Ballentine on 3/11/2020

NEW YORK (Bloomberg) - Exchange-traded fund investors are piling into the U.S. oil and gas industry, despite the recent collapse in prices, partly on bets that the government may bail out producers as part of a stimulus package.

State Street’s Energy Select Sector SPDR, or XLE, which invests in large-cap U.S. energy stocks, pushed its streak of inflows to nine out of 10 days, totaling about $1.7 billion, and is on track for its best month in four years, according to the most recent data available compiled by Bloomberg.

Vanguard Energy ETF, ticker VDE, a fund that invests in a wide range of small and large U.S. companies tied to the oil and gas sector, had its best inflow in more than year on Monday, even as crude prices plunged the most in nearly three decades as Saudi Arabia and Russia engaged in a battle over market share.

“If there is any type of targeted energy sector bailout, that will by design reduce the bankruptcies in the sector,” said James Pillow, a managing director at Moors & Cabot Inc., about the potential for government stimulus for energy companies. “That surely adds to the strength in the sector and supports the three days of inflows.”

In another sign of the turmoil whipsawing financial markets, investors are making wagers that a potential bailout would boost U.S. energy companies battered by tumbling oil prices. Republican senators pitched a bailout for the shale industry as part of measures being floated to stimulate the world’s largest economy that’s been rattled by the coronavirus outbreak.

But it’s anything but certain as the timing, details and even likelihood of a stimulus package to combat the virus impact and collapse of crude are still up in the air and far from being passed by Congress. Those concerns were visible Wednesday as U.S. energy producers tumbled along with the rest of stocks.

A breakdown in OPEC+ talks this weekend threatened to flood the world with cheap oil and ignited a sell-off in global markets. But the commodity staged a rebound. That filtered into funds tracking the oil market.

Citigroup’s VelocityShares 3x Long Crude Oil ETN, UWT, saw its biggest one-day inflow on record in the latest session, taking in $150 million, according to data compiled by Bloomberg. That boosted the fund’s assets by more than 50%, a sharp reversal after a 71% drop in price Monday threatened to wipe out the fund entirely.

To be sure, volatility still reigns in the oil market as Saudi Aramco announced maximum efforts to boost its oil production, with oil down again today to trade around $33 a barrel.

“We’ve been hearing a good amount of optimism that Russia and OPEC get back to the table by the end of March,” said Michael Reynolds, Investment Strategy Officer at Glenmede Trust Co. “If they can come to some sort of agreement that allows them to save face, it’s entirely possible this is a headwind that could be gone by the end of the month.”

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