West Texas Intermediate futures are up another 1.3% today, a gain that comes on the heels a massive Friday spike that sent oil traders scurrying to cover short positions. The oft-derided United States Oil Fund (NYSEArca: USO) is up nearly 4% today on volume that is almost 20% above the daily average.
Don’t look now, but USO has surged 9% over the past five days, indicating that it might be dangerous to consider bearish oil trades in the near-term. Then again, plenty of market observers see more downside for crude and fundamentals indicate that thesis could be validated.
“The rising supply of oil from U.S. shale fields has helped create a global glut, even as world-wide demand remains tepid. That, along with Saudi Arabia’s recent decision to keep its production apace, has helped send oil prices tumbling. Most analysts expect the pressure on prices to continue, raising questions about how investors can shift their portfolios to take advantage,” reports Gregory Zuckerman for the Wall Street Journal.
As the Journal notes, some investors have taken to shorting ETFs such as the CurrencyShares Canadian Dollar Trust (NYSEArca: FXC) and select holdings in the iShares MSCI Canada ETF (NYSEArca: EWC), the largest U.S.-listed Canada ETF.
Canada’s status as one of the largest non-OPEC producers in the world has plagued EWC and FXC this year, sending the ETFs to an average year-to-date loss of 7.2%. EWC allocates almost 23% of its weight to the energy sector, but traders have also taken to shorting Canadian banks as oil falls, leaving EWC vulnerable because the ETF devotes almost 36% of its weight to the financial services sector. [Canada ETFs Barely React to Rate Cut]
The iShares U.S. Energy ETF (NYSEArca: IYE) and rival equity-based energy ETFs have also started 2015 on the same glum note on which they ended 2014, but recent news that oil majors such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) are reducing capital spending, including buyback spending, rather than cutting dividends has recently brought some stability to these funds. [Big Energy ETFs Face Dividend Issues]
The UltraShort Oil & Gas ProShares (NYSEArca: DUG), which seeks to deliver twice the daily inverse performance of the Dow Jones U.S. Oil & Gas Index, the underlying benchmark for IYE, has surged 18% over the past 90 days, but traders have not embraced DUG. Nearly 18% million has been pulled from DUG this year.
However, there is evidence to suggest some traders believe more downside is coming for oil. USO has added over $1.1 billion in assets this year. That ETF’s assets and shares outstanding counts often rise as oil declines as short sellers come into the fund, creating new shares via the borrowing process. Additionally, the ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) has seen 2015 inflows of $7.5 million. [Traders Bypass the Best Leveraged ETFs]
United States Oil Fund