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Oil at Pre-OPEC Level: ETFs to Benefit

Sanghamitra Saha

Oil prices have been struggling since the start of this year pouring cold water on hopes building on the OPEC output cut deal signed in late 2016. To make the struggle more acute, U.S. crude oil ETF United States Oil USO plunged on May 4 on worries over brimming U.S. supplies. U.S. West Texas Intermediate (WTI) crude oil futures are now trading at $45.37 level – an almost five-month low and pre-OPEC level, at the time of writing.

This happened because instead of bringing about stabilization in the oil patch, the U.S. continued to pump oil and dampened the initial rally post OPEC deal. Per the deal, OPEC would have cut production by about 1.2 million barrels a day from January (read: How Effective is the OPEC Deal for an Oil ETF Rally?).

Plus, on December 10, OPEC cut the first deal with non-OPEC members since 2001 to reduce output this year. These pacts were formed for six months. Notably, Saudi Arabia has so far been responsible for most of the output cut (read: Top ETF Stories of the Fourth Quarter).

But offsetting the positive impact of this deal, the U.S. rig count touched 1,000 for first time in over two years, underpinning the resurgence in U.S. shale oil production. The latest U.S. Energy Information Administration’s latest report indicated that output increased for 11 weeks in a row. The agency also noted that crude inventory dropped less than expected in the week ended April 28 due to due to lower demand.

Other Dampening Factors

Investors are also mulling over if OPEC and non-OPEC members will extend of the output cut program beyond June. Notably, OPEC countries are slated to meet on May 25. Though some OPEC members hinted at the extension of the deal lately, there is less likelihood of any deeper cut, going forward.  

Weaker-than-expected manufacturing data both in China and the U.S. might have triggered off the oil price decline. Meanwhile, China’s strengthened its crackdown “on financial leverage and increased regulatory scrutiny.”

As per an article published on Bloomberg, these activities are viewed as a hindrance to demand in the world’s biggest energy consumer. As a result, oil prices slid on May 4, with United States Brent Oil (BNO) losing over 4.7%. So far this year (as of May 4, 2017), USO and BNO are down over 19% and 17%, respectively.

Is There Any Hope?

Head of energy commodities research at Barclays believes “that OPEC will manage to extend the cuts and we’ll see inventories fall in the second half of the year." Still, investors who want to capitalize on the current downbeat sentiment in the oil patch, may consider shorting oil or the entire energy space.

How to Profit?

So, for those seeking to make an inverse bet on oil as a commodity or on energy equities, below are a few inverse ETFs that may 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.

ProShares UltraShort DJ-UBS Crude Oil ETF SCO – Up 9.6% on May 4

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).

ProShares Short Oil & Gas ETF DDG – Up 2.1% on May 4

This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index.

ProShares UltraShort Oil & Gas ETF DUG – Up 4.4% on May 4

This fund seeks two times (2x) leveraged inverse exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index (read: Oil Service ETFs Down on Mixed Earnings & Oil Price Worries).

Direxion Daily Energy Bear 3x Shares ETF ERY – Up 5.7% on May 4

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

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US-OIL FUND LP (USO): 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
 
PRO-ULS OIL&GAS (DUG): ETF Research Reports
 
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