ETF Trends
ETF Trends

Crude oil traders and speculators continue to bet on the energy market’s demise, with hedge funds raising bearish wagers to a four-year high, pushing oil-related exchange traded funds to new lows.

After touching new all-time lows in early trading, the U.S. Oil Fund (NYSEArca: USO) and PowerShares DB Oil Fund (NYSEArca: DBO) both pared earlier losses Monday. Nevertheless, USO and DBO have both plunged about 51% over the past year. [Positioning for an Oil ETF Rebound? Watch For Contango.]

WTI crude oil futures were hovering around $45.9 per barrel while Brent crude oil futures were at $48.8 per barrel.

The bears are taking over as money managers raised short positions in WTI crude ot the highest level since September 2010 in the week ended January 20, reports Mark Shenk for Bloomberg. Meanwhile, net-long positions dipped for the first time in three weeks, which suggests speculators are losing faith in a rebound,

“There’s been a rush to call a bottom,” John Kilduff, a partner at Again Capital LLC, said in the article. “The fundamentals are still stacked against a rebound.”

Weighing on the oil outlook, Saudi Arabia’s new King, Salman Bin Abdulaziz Al Saud, ascended the throne after King Abdullah passed last week and stated that he will maintain the production policy of his predecessor.

“I don’t see any major catalyst from either the supply or demand side that will send prices higher this year,” Stewart Glickman, an equity analyst at S&P Capital IQ, said in the article. “It looks like $50 crude is the new reality that we’ll have to get used to.”

Additionally, U.S. production keeps pumping along as improvements in drilling technology, notably horizontal drilling and hydraulic fracturing, or so-called fracking, help squeeze oil from shale formations, despite an increase in idled oil rigs – U.S. rigs totaled 1,317 last week, the lowest level in two years.

“The drop in the rig count will have a limited impact. We’re going to see huge builds during the first quarter worldwide,” Mike Wittner, head of oil research at Societe Generale SA, said.

For those with a high conviction of further weakness in the energy space, investors can consider inverse ETF options as an alternative to options trading. The United States Short Oil (NYSEArca: DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) tries to reflect the two times inverse or -200% daily performance of WTI crude oil, VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil, PowerShares DB Crude Oil Short ETN (NYSEArca: SZO) tracks the simple inverse of oil, and PowerShares DB Crude Oil Double Short ETN (NYSEArca: DTO) takes also follows a -200% performance of oil. [Inverse ETF Plays for a Bearish Oil Outlook]

Potential inverse and leveraged ETF traders should be aware that these funds may diverge from their target strategy of the long-term due to compounding issues from daily rebalancing. [Do You Know How Your Leveraged ETFs Work?]

For more information on the oil market, visit our oil category.