The energy sector has shown an encouraging turnaround in the initial weeks of 2025, becoming a leader after being a laggard over the past two years. Energy Select Sector SPDR Fund XLE has gained 6.5%, outperforming the broad market index fund SPY, which has shed 0.7%.
While most energy ETFs rallied in the initial weeks, Invesco S&P 500 Equal Weight Energy ETF RSPG, iShares U.S. Oil & Gas Exploration & Production ETF IEO, First Trust Natural Gas ETF FCG, Invesco Energy Exploration & Production ETF PXE and SPDR S&P Oil & Gas Exploration & Production ETF XOP led the way higher. These funds have gained nearly 8% on the day.
The solid rebound has been driven by a surge in oil and gas prices amid colder weather, falling U.S. stockpiles and additional sanctions on Russia’s oil sector. Let’s dig into them:
Cold Weather
Many U.S. states and European cities are experiencing extreme weather, raising concerns about potential disruptions to oil production and refinery operations. The cold snap raised the demand for heating oil, thereby lifting oil and gas prices (read: Cold Snap Drives Natural Gas ETFs).
Declining Inventories
Crude inventories are falling. Per the latest report from Energy Information Administration (EIA), domestic crude oil stocks fell for the seventh time in a row last week, the longest declining streak since July 2021.
Sanctions
The fresh sanctions on Russian oil producers and tankers have raised concerns about oil supplies. The United States imposed its most aggressive and ambitious sanctions on Russia’s oil industry, targeting two large exporters — Gazprom Neft and Surgutneftegas — and 183 vessels. The move, aimed at curbing the revenues that Moscow uses to fund its war in Ukraine, will disrupt Russian crude supplies to major importers — China and India. This will push the two top buyers to source more oil from the Middle East, Africa and the Americas, thereby boosting oil prices (read: Oil Prices Climb Amid Rising Geopolitical Tensions: ETFs to Win/Lose).
Notably, Russia is the second-largest oil exporting country in the world behind Saudi Arabia and the third-largest producer of the commodity behind the United States and Saudi Arabia.
Backwardation: A Bullish View
Currently, Brent and WTI monthly spreads are trading at their widest backwardation since the third quarter of 2024. Later-dated contracts are cheaper than near-term contracts in the oil futures market in backwardation, indicating tight supply and robust demand. A market in backwardation is likely to persist, at least in the near term, acting as the biggest catalyst for the oil.
Increased Long Positions
Further, speculators ramped up bullish bets on Brent crude oil to a 6-month high by raising their positions in commodity futures and options in the week to Jan. 7 , per the U.S. Product Futures Trading Commission (CFTC). Hedge funds also received their biggest weekly boost in lots since Oct. 8.
Here, we have profiled the abovementioned ETFs:
Invesco S&P 500 Equal Weight Energy ETF (RSPG)
Invesco S&P 500 Equal Weight Energy ETF offers equal-weight exposure to energy stocks in the S&P 500 Index. It follows the S&P 500 Equal Weight Energy Plus Index and holds 23 stocks in its basket. RSPG has amassed $549.4 million in its asset base and charges 40 bps in annual fees. It has a Zacks ETF Rank #3 (Hold).
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
iShares U.S. Oil & Gas Exploration & Production ETF provides exposure to U.S. companies that are engaged in the exploration, production and distribution of oil and gas. It tracks the Dow Jones U.S. Select Oil Exploration & Production Index and holds 47 stocks in its basket. iShares U.S. Oil & Gas Exploration & Production ETF has an AUM of $605.9 million and trades in an average daily volume of 105,000 shares. The fund charges 40 bps in fees per year and has a Zacks ETF Rank #3 (read: Oil ETFs Jump at the Start of 2025 as Supply Tightens).
First Trust Natural Gas ETF (FCG)
First Trust ISE-Revere Natural Gas Index Fund offers exposure to U.S. companies that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 42 stocks in its basket. First Trust ISE-Revere Natural Gas Index Fund has amassed $445.2 million in its asset base while charging 60 bps in annual fees. Volume is good, with 410,000 shares exchanged per day, on average. The product has a Zacks ETF Rank #3.
Invesco Energy Exploration & Production ETF (PXE)
Invesco Energy Exploration & Production ETF follows the Dynamic Energy Exploration & Production Intellidex Index, which thoroughly evaluates companies involved in the exploration and production of natural resources used to produce energy based on a variety of investment merit criteria, including price momentum, earnings momentum, quality, management action and value. Holding 32 stocks in its basket, Invesco Energy Exploration & Production ETF has amassed $107.7 million in its asset base and charges 63 bps in annual fees. It trades in a volume of 45,000 shares and has a Zacks ETF Rank #3.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
SPDR S&P Oil & Gas Exploration & Production ETF provides exposure to 53 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has an AUM of $2.4 billion and trades in an average daily volume of 2.4 million shares. SPDR S&P Oil & Gas Exploration & Production ETF charges 35 bps in fees per year and has a Zacks ETF Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
