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Oil Likely to See Steepest Weekly Fall: Inverse ETFs to Profit

Sanghamitra Saha

Oil is likely to see the maximum weekly drop since last December. United States Oil Fund, LP USO has lost 7.7% in the past five days (as of May 23, 2019) and United States Brent Oil Fund, LP BNO has fallen 6.8%. On May 23, both the funds have retreated about 5.1% and 4.4%, respectively.

What’s Behind the Oil Crash?

US-China trade tension is a key concern. U.S. President Donald Trump administration has lifted tariffs on $200 billion worth of Chinese goods from 10% to 25% on May 10 and China announced a retaliatory move — a tariff hike on $60 billion of American goods to 25% starting Jun 1.

Trump is also considering additional tariffs on an incremental $325 billion of Chinese imports(read: Full-Blown Trade Spat: 5 Most-Vulnerable Sector ETFs & Stocks).

Washington also forbade U.S. firms from doing business with Chinese giant Huawei, citing national security concerns. On May 23, the U.S. Commerce Department said that it was proposing a new rule to implement anti-subsidy duties on products from countries that undervalue their currencies against the U.S. dollar, another move that could undermine Chinese trade.

Since rising US-China trade conflict can impede global growth demand, oversupply concerns have hurt oil price.

EIA data was another factor that dealt a blow to oil price. Data showed a great deal of weekly inventory build-up in the United States, defying expectations of a decline. Crude inventories rose by 4.7 million barrels for the week ending May 17 to a 22-month high. Analysts had expected some 2 million barrels of draw. Lower refinery runs and solid decrease in exports led to the second successive surprise stockpile build. This was partly counterbalanced by a decline in imports.

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 top five inverse ETF gains in a one-week time frame (as of May 23, 2019).    

Short Oil

United States 3x Short Oil Fund USOD — Up 26.6% past week

The United States 3x Short Oil Fund is designed to inversely reflect three times the movement of West Texas Intermediate light, sweet crude oil. The expense ratio is 1%.

ProShares Daily 3x Inverse Crude ETN WTID — Up 25.02%

The UBS ETRACS - ProShares Daily 3x Inverse Crude ETN is linked to the daily compounded 3x leveraged inverse performance of the Bloomberg WTI Crude Oil Subindex ER, less investor fees. The expense ratio is 1.85%.

ProShares UltraShort Bloomberg Crude Oil SCO— Up 16%

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).

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 a high-risk tolerance.

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US Commodity Funds United States Oil Fund (USO): ETF Research Reports
 
ProShares UltraShort Bloomberg Crude Oil (SCO): ETF Research Reports
 
United States Brent Oil Fund LP (BNO): ETF Research Reports
 
United States 3x Short Oil Fund (USOD): ETF Research Reports
 
UBS ETRACS - ProShares Daily 3x Inverse Crude ETN (WTID): ETF Research Reports
 
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