How Geopolitical Risk Impacts Energy ETFs

Following military strikes over the weekend, disruptions in the Strait of Hormuz — a chokepoint responsible for roughly 20% of global oil flow — have sent markets into a risk-off frenzy. As of this morning, WTI Crude has jumped about 8% to trade above $70 per barrel (bbl), while Brent Crude is surging toward the $80 mark. 

For financial advisors, this volatility serves as a reminder of why maintaining energy exposure is important, even when the sector feels out of favor, Stacey Morris, VettaFi head of energy research, said. However, not all energy ETFs respond to commodity spikes in the same way, making it important to understand each subsector’s sensitivity to oil prices.

Upstream companies, or exploration and production (E&P) firms, tend to be the most sensitive to commodity price fluctuations. These companies make money by extracting oil and natural gas and selling them at market rates. E&Ps tend to be highly sensitive to the current geopolitical premium because their margins expand directly with the price of crude. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP B+) and the Texas Capital Texas Oil Index ETF (OILT ) are vehicles for this exposure. 

Closely linked to upstream is the oilfield services subsector, dominated by the VanEck Oil Services ETF (OIH B+). These firms facilitate production and often see increased demand when high prices incentivize more drilling activity.

For clients seeking income with lower volatility, midstream remains the defensive energy play. Companies in this segment — like those found in the Alerian MLP ETF (AMLP A-) — operate pipelines and storage facilities. They earn fees for shipping and handling rather than selling the raw commodity, lending to stable cash flows. This model provides a buffer against swings in oil prices while offering generous yields for income-focused portfolios.

Finally, downstream includes companies that are closest to the end user, including refineries, gas stations, and petrochemical companies. Refineries have a different sensitivity to commodity prices. They profit on the spread between their input costs (crude oil) and their output (gasoline, diesel, jet fuel, etc.). 

Working across the value chain, there are integrated majors like Exxon and Chevron. These companies have upstream arms where they’re producing oil and gas and downstream arms where they’re refining oil. 

While many investors expect the Energy Select Sector SPDR Fund (XLE A) to offer a more balanced approach to the energy sector, it’s important to recognize that roughly 41% of its weight is concentrated in integrated majors like Exxon and Chevron. 

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vettafi.com is owned by VettaFi LLC (“VettaFi”). VettaFi is the index provider for AMLP and OILT, for which it receives an index licensing fee. However, AMLP and OILT are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of AMLP and OILT.