Investors: Don’t Overreact to Bearish Oil Calls
The United States Oil Fund (USO) , which tracks West Texas Intermediate crude oil futures, and the United States Brent Oil Fund (BNO) , have retreated a bit in recent days amid calls that new supply is coming online. That is stoking speculation that oil futures could fall below $40 per barrel, but investors should be careful before getting too bearish on crude.
Looking at the futures market, the one-year price contango – where neat-term contracts are cheaper those a year ahead, on crude oil has almost doubled, signaling that demand from buyers like refiners could be weakening, reports Grant Smith for Bloomberg.
Related: A Factor that Could Hinder Oil ETF Investing
Contango does speak to a potentially over-supplied market, but there are diverging views among market participants about where crude goes from here.
While production has declined in the U.S., recently rebounding oil prices are encouraging exploration and production companies to revisit spending plans with some increasing capital expenditures. That has some oil market observers concerned about a rising rig count and the subsequent impact on crude prices.
“While we aren’t in the camp arguing for +$60 oil in 2016 based on the above trends, we do see trending market balance as limiting the downside risk for oil and would most likely look to own 35-25 delta $5-$10 wide call spreads with 4Q16 maturity, sell $35-$30 puts or own WTI structure such as WTI Z16/Z17 if an FX driven sub $40 crude oil move materializes in the coming weeks,” said SCS OTC Corp. in a post on OilPrice.com.
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Investors who are wary of additional weakness in the oil market have a number of bearish options to choose from, like the simple inverse United States Short Oil (DNO) and DB Crude Oil Short ETN (SZO) .
Related: A Very Bullish Call for Oil ETFs
For the more aggressive, bearish trader, there are number of leveraged options, including the ProShares UltraShort Bloomberg Crude Oil (SCO) , which tries to reflect the two times inverse or -200% daily performance of WTI crude oil, and DB Crude Oil Double Short ETN (DTO) , which also follows a -200% performance of oil. Lastly, the VelocityShares 3x Inverse Crude (DWTI) takes the three times inverse or -300% performance of crude oil.
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United States Oil Fund
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
