Oil exchange traded fund traders shouldn’t get too comfortable with the rebound in energy prices as the continued U.S. shale oil boom and rising production out of Organized Petroleum Exporting Countries could fuel the ongoing glut.
Since the March lows, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, rose 28.1%, United States Brent Oil Fund (NYSEArca: BNO) gained 21.9% and the Energy Select Sector SPDR (NYSEArca: XLE) increased 9.3%. [Traders Quick to Reap Profits in Oil ETFs]
However, in a recent note titled New Oil Order, Goldman Sachs has issued a warning on the energy space, cutting its long-term WTI crude oil price forecasts to $50 per barrel from $60 by the end of the decade, reports Julie Verhage for Bloomberg.
“We see potential for OPEC/the US to gain share longer term, even as WTI falls from $60 to $50 by the end of the decade,” Goldman analysts said.
On Monday, WTI crude oil futures were trading around $59.8 per barrel while Brent crude oil futures were hovering around $66.4 per barrel.
Goldman argues that the U.S. hydraulic shale fracturing boom will continue even as OPEC obstinately refuses diminish production. For instance, while oil frackers reboot operations in the U.S. with oil prices higher, Saudi Arabia’s crude exports in March rose to their highest in almost a decade, Reuters reports. [Energy ETFs: Drillers Can Shoot Their Own Feet If Not Careful]
“Greater productivity in shale, startups of already sanctioned other non-OPEC projects and a greater willingness of OPEC to keep production levels elevated create a confluence of deflationary pressures for both oil and North American natural gas prices,” Goldman analysts said. “We now assume WTI oil prices of $57/$60/$60 per barrel in 2016/17/18.”
Consequently, ETF investors may be back to inverse options as a way to hedge or capitalize on the fall in oil. For instance, the United States Short Oil (NYSEArca: DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, DB Crude Oil Short ETN (NYSEArca: SZO) tracks the simple inverse of oil, ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) tries to reflect the two times inverse or -200% daily performance of WTI crude oil, DB Crude Oil Double Short ETN (NYSEArca: DTO) also follows a -200% performance of oil and VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil. [Investors Capitalize on Oil Swings with Leveraged ETFs]
Moreover, the investment bank contends that the “lower-for-longer oil price” would “put significant pressure” on integrated oil companies and potential force some to rethink on dividends, notably singling out BP and Staoil for downgrades to “sell” from “neutral,” Reuters reports.
For those seeking a hedge to 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.
For more information on the oil market, visit our oil category.
Max Chen contributed to this article.