Saudi Arabia cut its price of oil exports, pushing down crude oil futures to a three-year low. Energy traders who believe the bearish market conditions will persist can utilize inverse commodity- and sector-related exchange traded funds to play the slip.
For instance, the ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) tries to reflect the two times inverse, or -200%, daily performance of WTI crude oil. The United States Short Oil (NYSEArca: DNO) tracks the opposite moves of light. Additionally, the VelocityShares 3x Inverse Crude (NYSEArca: DWTI) tracks the daily -300% performance of oil prices. Over the past three months, SCO has increased 41.4%, DNO gained 20.2% and DWTI increased 66.6%.
West Texas Intermediate crude oil futures now trade around $77.1 per barrel while Brent crude futures hover at $83.1 per barrel.
For the equities side, the ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse, or -100%, daily performance of the Dow Jones U.S. Oil & Gas Index. The UltraShort Oil & Gas ProShares (NYSEArca: DUG) takes two times the inverse, or -200%, daily performance of the Dow Jones U.S. Oil & Gas Index. Lastly, the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY) reflects three times the inverse, or -300%, daily performance of the energy select sector index. Over the past three months, DDG increased 10.4%, DUG rose 18.5% and ERY gained 26.9%. [Leveraged ETFs for the Adventurous]
In comparison, the S&P 500 Energy Index has declined 11.1% over the past three months.
Potential investors should keep in mind that inverse and leveraged exchange traded products may not perfectly reflect their intended target strategies over the long-term due to daily rebalances and compounding issues.
Weighing down oil prices, Saudi Arabia cut its December differentials for all grades of oil shipped to the U.S. and increased the spreads for supplies to Asia and Europe, reports Moming Zhou for Bloomberg.
Anthony Lerner, senior vice president of industrial commodities at brokerage R.J. O’Brien & Associates LLC, points out that the switch in Suadi Arabia’s structure “triggered a cascade of selling” from algorithmic traders Tuesday, reports Nicole Friedman for the Wall Street Journal.
The shift in the U.S. contract structure is “the final nail in the coffin of the market,” Lerner said in the article, forecasting prices to continue to fall. “It means there’s a lot of supply.”
Meanwhile, the Organization of Petroleum Exporting Countries have also resisted pressure to curb output, which would have supported oil prices.
Saudi’s lower price targets are an attempt to push out U.S. shale oil producers, who require a higher oil price to maintain profitable margins. Recently, Citigroup argued that “full-cycle” costs, which include land, infrastructure, well drilling and operating costs, for new shale projects require oil prices of at least $70 to $80 per barrel. [Oil ETFs Languish Under Extended Bearish Outlook]
“People are panicking,” Bill O’Grady, chief market strategist at Confluence Investment Management, said in the Bloomberg article. “There is this pervasive belief that the Saudis are in a market-share war.”
For more information on the oil market, visit our oil category.
Max Chen contributed to this article.