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Are Good Times Over for the Oil Patch? ETFs to Profit

ASGN vs. FICO: Which Stock Is the Better Value Option?

This is a great year for oil prices with United States Oil USO adding 13.3% and United States Brent Oil BNO jumping 17.6% so far (as of May 25, 2018). Reduction in supplies thanks to the OPEC output cut deal and crisis in Venezuela gave oil price the initial boost.

Adding to the tailwinds were President Donald Trump’s declaration of putting an end the Iran nuclear deal and imposition of sanctions against Iran and Venezuela. All these sparked fears of supply crunch and favored global oil prices.

After a stellar run in the last two months (as of May 25, 2018),oil prices now seem to be reversing courtesy of rising output concerns from two big players — Saudi Arabia and Russia (read: Oil & Energy ETFs on 52-Week High on Venezuela Tension).

The duo is reportedly mulling over pumping up more oil to lessen consumer anxiety after prices hopped to levels last seen in 2014. As of now, talks are rife that OPEC and Russia would choose to lift output by 1 million barrels per day. On May 25, USO lost about 4.3%, while BNO shed about 3.1% on output apprehensions.

However, it is yet uncertain if such a move is possible amid the ongoing output cut agreement. We’ll have a clear idea after the Vienna meeting next month. Notably, the present deal, effective Jan 1, 2017, requires global oil producers to lower their collective output by 1.8 million barrels per day (bpd) to the end of 2018 to shed huge stockpiles.  

Why Fears of Output Surge are Rife

There are a few reasons which made market watchers think that an output rise is in the cards. The OPEC and non-OPEC output cut agreement is deemed to have wiped out the glut which in turn may lead Saudi Arabia and Russia to produce more without any support from allies, per Bloomberg.

The International Energy Agency cited that as of March, OPEC had 3.4m b/d of extra capacity for output, with Saudi Arabia making up about 64% of the total, suggesting room for an output push-up, per Financial Times. Actually, plunging Venezuelan output due to an economic crisis has helped OPEC and its partners bring a larger cut than planned so far.

Moreover, Russian President Vladimir Putin said oil prices at $60 go well with his country. The level is much lower than the May-high of $80. In March and April 2018, Russia even did not fulfil the deal, pumping at the clip of 10.97 million bpd, marking an 11-month high.

China has also reportedly expressed concerns on the supply crunch issue, according to a Saudi statement, which may goad Saudi and Russia to raise the production limit. If this was not enough, Donald Trump appeared annoyed with the latest spike in oil prices that made consumers pay more in pumps. Though higher oil price is favorable for OPEC ace Saudi, the country is unlikely to have a stressed relation with Washington (read: How to Trade Oil with ETFs After Surging U.S. Output).

How to Play?

Against this backdrop, investors aiming to cash in on the latest slump or expecting more declines in this liquid commodity, can short oil and energy ETFs. Below we highlight a few choices.

Short Oil

ProShares UltraShort Bloomberg Crude Oil SCO – Up 8.53% on May 25

SCO tracks the Bloomberg WTI Crude Oil Subindex to provide twice the inverse performance, on a daily basis of WTI crude oil (see all inverse commodity ETFs here).

United States Short Oil Fund DNO – Up 4.2% on May 25

The fund seeks to match the inverse performance of the spot price of light sweet crude oil.

Short Energy Stocks

ProShares Short Oil & Gas ETF DDG – Up 4.7% on May 25

This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The index looks to track the performance of the energy sector of the U.S. equity market.

ProShares UltraShort Oil & Gas ETF DUG – Up 5.2% on May 25

This fund seeks two times (2x) leveraged inverse exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index.

Direxion Daily Energy Bear 3x Shares ETF ERY – Up 7.8% on May 25

This product provides three times (3x) inverse exposure to the Energy Select Sector Index.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders. Still, for ETF investors who are bearish on the oil patch for now, a near-term short could be intriguing for those with high-risk tolerance.

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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
DIR-EGY BEAR 3X (ERY): ETF Research Reports
PRO-SH OIL&GAS (DDG): ETF Research Reports
US-SHRT OIL FD (DNO): ETF Research Reports
PRO-ULS OIL&GAS (DUG): ETF Research Reports
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Zacks Investment Research
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