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Oil in Bear Territory: Short Oil & Energy ETFs

Zacks Equity Research

The rosy days for oil are passing it seems. Worries are once again building up in the oil patch as the price of this liquid commodity has slipped back to the $40 level on supply glut concerns. The latest threat came from higher OPEC production and a rise in the number of rigs operating in U.S. oil fields for five successive weeks.

Nigeria and Libya, thwarted by supply disruptions, can ramp up output by the second half. Nigeria's government is likely to restart ‘cash payments to militants in the oil-rich Niger Delta’. Saudi Arabia – OPEC’s top brass – pushed output levels to near record highs in order to beat the elevated levels of Iran output.

As per Baker Hughes’ latest rig count, domestic oil drillers used 44 more oil rigs last month – an addition not seen in a month since April 2014. Also, with output in Canada resuming after wildfire issues, raw crude inventory in the U.S. witnessed an unexpected increase last week. Plus, Russia is not sitting idle as it has been ramping up supplies for three consecutive months.

Oil started 2016 on an extremely low note, having plunged to as low as a below-$30 level in February but finally sprung to $50 in June, on easing abundance (read: Best Oil Rally in 7 Years; 3 Energy ETF Winners).

But the recent rise in global crude output has pushed oil prices down by 20% since then. A drop of about 20% from the previous high points to a bear market.

Demand Scenario Unsteady Too

If the supply scenario started to spook oil investors, the demand picture is no better. As U.S. factory output growth slowed somewhat in July (though it remained in the growth territory for the fifth successive month) and came in weaker than expected, questions began to pile up on the health of the U.S. economy. Alongside, U.S. construction spending declined for three months in a row in June. Meanwhile, Q2 GDP data for the U.S. economy came in weaker than expected.

Though a private survey hinted that China's manufacturing sector grew for the first time in 17 months, official data showed that activity suddenly dropped to the contraction zone.Also, the Euro zone's manufacturing sector lost momentum in July as output fell in France and almost stagnated in Spain and Italy, as per surveys of purchasing managers. Brexit poses a huge threat as export demand is being questioned (read: 6 Sector ETFs Threatened by Brexit Uncertainty).

Oil in Bear Market

All these have pushed oil to an almost bear market. United States Oil USO – which looks to track the daily changes of the spot price of U.S. crude – lost over 20% in the last one month (as of August 2, 2016). 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 18.2% (see: all the energy ETFs here).

However, there are analysts who are eyeing a revival next year. As per the median of at least 20 analyst estimates compiled by Bloomberg, global oil prices will likely average $57 a barrel in 2017.

Whatever be the case, for the near term, the crude rally is nowhere to be seen. So, it is better to short oil and energy stocks with ETFs. Below we highlight a few options which stand to gain if oil remains below $40 in the days to come (read: 5 ETFs for Those Who Believe the Oil Rally is Over):

Short Oil

United States Short Oil Fund DNO

The fund seeks to match the inverse performance of the spot price of light sweet crude oil WTI. It charges 60 bps in fees per year from investors.

ProShares UltraShort Bloomberg Crude Oil ETF (SCO)
The fund tracks the Bloomberg WTI Crude Oil Subindex to provide twice the inverse performance, on a daily basis of WTI crude oil. The fund charges 95 bps in fees exposure (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 expense ratio of the product is 1.35%.

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. The fund charges 95 bps in fees.

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 charges 95 bps in fees.

Direxion Daily Energy Bear 3x Shares ETF ERY

This product provides three times (3x) inverse exposure to the Energy Select Sector Index. the fund charges 95 bps in fees.

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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
VEL-3X INV CRD (DWTI): 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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