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Forget Production Cut: Short Oil & Energy ETFs

Zacks Equity Research

The freefall in oil prices for over the past one and a half years had taken a brief pause in recent sessions on hopes of an output freeze by the Organization of the Petroleum Exporting Countries (OPEC). The biggest oil producing countries – Saudi Arabia and Russia – along with Qatar and Venezuela had agreed to freeze oil output at the January level if other countries joined them in the initiative (read: Oil ETFs in Focus on Oil Output Freeze Talks).


Had the move materialized, the oil patch – which has long been suffering from higher supplies and lower demand on weak global growth – would see prices shoring up and losses paring down. Many had started to view the move as the beginning of the long-wished for production cut.

However, all optimism went down the drain after Iran called the OPEC top-brass Saudi Arabia-led initiative a ‘joke’. In any case, chances of Iran’s joining the treaty were slim as the country has been trying to boost production after the sanctions on it were lifted last month. This is because Iran was producing below its capacity and pre-sanctions levels since 2011 while the other countries had raised their output limit to record levels in the mean time.


After Iran’s remark, Saudi Arabia also scrapped the option of output cuts by major producers in the near term. However, Saudi oil minister Al-Naimi also noted that he expects more countries to agree on the output freeze scheme by next month.


So while output cut has taken a backseat, investors should also keep in mind that there is no improvement in the demand scenario either. Earlier this month, the International Energy Agency (IEA) slashed its estimates for global oil demand for 2015 and 2016, by 100,000 barrels a day. This represents flat demand growth (1.2 million barrels a day) this year.


Market Impact


Following the dimming prospects of an output cut and limited benefits from a likely output freeze at record levels, oil prices started giving up prior gains. United States Oil (USO) – which looks to track the daily changes of the spot price of the U.S. crude – lost over 4.8% on February 23 while it lost about 1.3% after hours. On the other hand, United States Brent Oil (BNO) – which looks to track the daily changes in percentage terms of the spot price of Brent crude oil – was off 3.5% on February 23 (see: all the energy ETFs here).


Short Oil


Given the situation, investors may want to consider shorting oil or the entire energy space. So, for investors seeking to make an inverse bet on oil as a commodity or on the energy equities, below are three ETFs pertaining to each case. Any of these will prove gainful amid declining oil prices. However, investors should keep in mind that a short play in the futures market requires a strong appetite for risks (read: If the Oil Crash Continues, Buy These 5 ETFs to Outperform).

 

ProShares UltraShort DJ-UBS Crude Oil ETF (SCO)

 

SCO is the most popular option in the short oil ETF space. The fund tracks the Dow Jones-UBS Crude Oil Sub-Index to provide twice the inverse performance, on a daily basis of WTI crude oil. The fund was up 8.5% on February 23 while it added 2.7% after hours.


 PowerShares DB Crude Oil Double Short ETN (DTO)

 

The note follows a benchmark of crude oil futures contracts to provide -2x exposure. The fund added more than 7.4% on February 23, 2016 (see all Inverse Commodity ETFs here).

   

VelocityShares 3x Inverse Crude ETN (DWTI)

 

DWTI is one of the riskier ways to play the short oil market, utilizing -3x exposure with daily rebalancing. The fund tracks the S&P GSCI Crude Oil Index to provide exposure to crude oil. The product surged 14.4% on February 23, obviously for its triple-leverage strategy and advanced 4.8% after hours (read: 8 Inverse Leveraged ETFs That Soared 70% or More in 2015).


Short Energy  


ProShares Short Oil & Gas ETF (DDG)


This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The ETF makes a profit when the energy stocks decline and is suitable for hedging purposes against the fall of these stocks.  DDG was up 3.3% on February 23.


ProShares UltraShort Oil & Gas ETF (DUG)


This fund seeks two times (2x) leveraged inverse exposure to the Dow Jones U.S. Oil & Gas Index. DUG returned more than 6.5% on February 23.


Direxion Daily Energy Bear 3x Shares ETF (ERY)


This product provides three times (3x) inverse exposure to the Energy Select Sector Index. The fund surged over 10% on February 23 and added 1.9% in after-market trading.


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US-OIL FUND LP (USO): ETF Research Reports
 
US BRENT OIL FD (BNO): ETF Research Reports
 
PRO-ULS BB CRUD (SCO): ETF Research Reports
 
DB CO DS (DTO): ETF Research Reports
 
VEL-3X INV CRD (DWTI): ETF Research Reports
 
PRO-SH OIL&GAS (DDG): ETF Research Reports
 
PRO-ULS OIL&GAS (DUG): ETF Research Reports
 
DIR-EGY BEAR 3X (ERY): ETF Research Reports
 
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