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Oil Tumbles to Six-Year Low: ETF Tale of Two Sides

Sweta Killa

As the dollar started to gain strength once again and crude supplies showed renewed signs of piling up amid waning demand, U.S. crude prices were yet again trapped in the downward spiral in the past couple of weeks (read: Oil ETFs Slide Again: More Pain in Store?).

In fact, crude tumbled to below $42 per barrel in early trading session today, a level not seen in more than six and half years. With this, the oil price is down more than 31% since its recent peak in early June. The demand and supply dynamics for oil is getting worse by the day. This is especially true, as biggest U.S. refinery in the Midwest is suffering from an unexpected outage that may take months to resolve. This will add to the global supply glut.

Additionally, the Organization of Petroleum Exporting Countries (OPEC) has pumped up maximum oil in more than three years thanks to higher output from Iraq, Iran and Angola. Iran is looking to boost its production further once the Tehran sanctions are lifted. Meanwhile, oil production in the U.S. has been on the rise and is hovering around its record level. As per the latest EIA report, while the U.S. crude stockpiles fell by 1.68 million barrels in the week (ending August 7), it failed to match the market expectation of a 1.9 million barrel decline. Total inventory came to 453.6 million barrels, representing the highest level in at least 80 years.

The International Energy Agency (IEA) in its recent monthly report stated that the global oil market would remain oversupplied through 2016 though lower oil prices and a strengthening economy will boost oil demand at the fastest pace in five years.

However, demand is currently not as strong as expected. The major culprit is China, which persistently slowing despite the rounds of monetary easing. The latest measure taken by China to devalue its currency has raised more worries over demand in the world’s second largest economy (read: China Currency Devaluation is Awful News for These ETFs).

In such a bearish backdrop, the oil industry is losing with oil/energy ETFs piling up heavy losses over the past one month while transportation stocks and ETFs, especially airlines, enjoying higher profits on cheap fuel. This trend is likely to continue for the coming months if oil prices continue to trend downward.

Oil/Energy ETFs

Oil ETFs tracking the futures contract are in deep red from a one-month look. In particular, iPath S&P GSCI Crude Oil Index ETN (OIL) stole the show tumbling nearly 21%, followed by declines of 18.5% for United States Oil Fund (USO), 15.8% for iPath Pure Beta Crude Oil ETN (OLEM) and 14.4% for United States Brent Oil Fund (BNO).


In the energy equity world, while most of the energy ETFs are seeing terrible trading, First Trust ISE-Revere Natural Gas Index Fund (FCG) and PowerShares S&P SmallCap Energy Fund (PSCE) were hit the most over the past one month, plunging 16% and 14.6%, respectively. The former offers exposure to the U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas while the latter targets the small cap segment of the broad energy sector. Both funds have a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook (see: all the energy ETFs here).

Transportation ETFs

Lower oil price and an improving U.S. economy have been driving transporters higher with airlines flying at greater altitude. The only airline ETF U.S. Global Jets ETF (JETS), which debuted in late April, surged nearly 5.5% over the past one month. The product looks to offer global exposure to commercial airlines, aircraft manufacturing and airport industries (read: 4 ETFs Leading the Pack in Q2 Earnings).

Other transportation ETFs targeting the broad sector like iShares Dow Jones Transportation Average Fund (IYT) and SPDR S&P Transportation ETF (XTN) have been relatively flat in the past one month. The duo has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.

Bottom Line

Given sliding oil prices, investors either can go long on the above-mentioned transport and airline ETFs or short on oil with a number of inverse ETFs for big gains in a short span. Notable among these are VelocityShares 3x Inverse Crude ETN (DWTI), ProShares UltraShort Bloomberg Crude Oil (SCO) and PowerShares DB Crude Oil Double Short ETN (DTO).