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In a notable market shift, U.S. crude prices recorded a drop of 5% on Thursday. This decline comes in the wake of increasing inventories and a downturn in industrial production. United States Oil ETF (USO) was off 4.6% on Nov 16, 2023 while United States Brent Oil ETF (BNO) lost 4.4% on that day.

Rising U.S. Crude Inventories and Steady Production

Adding to the market's concerns, U.S. crude inventories increased by 3.6 million barrels in the last week, while output maintained a stable pace of a record 13.2 million barrels per day. This data, released by the Energy Information Agency, highlighted a significant uptick in supply amid fluctuating demand.

U.S. Industrial Production Under Pressure

The U.S. industrial sector has been going through a rough patch, with production declining 0.6% in October. This decline was significantly impacted by the United Auto Workers strike, particularly affecting motor vehicle output.

Expert Insights on Market Trends

Phil Flynn, an oil expert with the Price Futures Group, noted that the combination of slower industrial production and increased supply corroborates the theory of slowing demand, as quoted on CNBC. He pointed out that the market is struggling to find support as bearish sentiments take hold.

In China, a key player in the global oil market, crude refining throughput in October slowed by 2.8% to 15.1 million barrels per day, a drop from the previous month's record high. This suggests a slowing demand in the world’s second-largest economy.

Jim Burkhard, president of S&P Global Commodity Insights, commented on the fading impact of China's economic reopening post-pandemic and highlighted the record production levels in the U.S., Canada, Brazil, and Guyana, as quoted on CNBC.

Against this backdrop, it would be prudent to discuss ETF areas that tend to gain on falling crude prices as well as the ones that are likely to underperform.

Likely Gainers

Retail - SPDR S&P Retail ETF (XRT)

Falling energy prices bode well for retailers as consumers will spending less at gas stations. In fact, not only oil, overall inflation is falling, boosting consumers’ buying power. This, in turn, is likely to lead the Fed to stay put or cut rates. Falling rates, in turn, would again boost consumers’ ability to shell out on discretionary items.

Oil Refiners – VanEck Vectors Oil Refiners ETF (CRAK)

Companies in the refining segment benefit from lower oil prices as crude is one of their main input costs. After buying crude, refiners transform it to the finished product gasoline. Now, with crude prices falling, refiners may see a higher crack spread and their profitability may be increased.

Airlines - U.S. Global Jets ETF (JETS)

The airline sector also performs better in a falling crude scenario. This is especially true as energy costs form a major portion of the overall cost of this sector. So, falling crude prices are likely to boost earnings of airline companies.

Likely Losers

Energy – Energy Select Sector SPDR Fund (XLE)

This is the most obvious choice. If oil price is staging a downtrend on higher supplies, oil exploration and production stocks are sure to lose as these companies will have less incentive to pump more oil over the medium term. Plus, the fund yields 3.59% annually.

Steel – VanEck Vectors Steel ETF (SLX)

Steel producers underperform if oil prices crater. The industry supplies materials to build and expand oil drilling operations. Since an oil price decline can result in less capital expenditure by drillers, steel stocks should fall in prices.

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