Oil investors may be getting ahead of themselves, betting on an overly optimistic outlook in the energy market. Oil exchange traded fund traders, on the other hand, have been quietly pulling out.
Over the past month, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, rose 16.0% and United States Brent Oil Fund (NYSEArca: BNO) gained 15.0%. [Traders Quick to Reap Profits in Oil ETFs]
WTI crude oil futures are now hovering around $58.8 per barrel and Brent crude oil futures were trading around $66.3 per barrel after a decline in U.S. rig counts and geopolitical tensions in the Middle East helped diminish the supply outlook.
However, Eugen Weinberg, head of Commodity Research at Commerzbank, warned that a rally in oil prices was “premature,” reports Holly Ellyatt for CNBC.
“I wouldn’t be surprised if we saw the current $59 go even below $50, should this rally stall and should we come to this correction,” Weinberg said on CNBC. “I think it’s more hopes driving the market rather than the real facts. I wouldn’t be surprised to see a short-term correction, a strong correction because of all the fundamental data. I think the rally is premature and would be probably looking for the prices (to go more) below $60 in a month’s time than above $70, for Brent.”
Oil ETF investors have already been growing more cautious as the price of oil spiked. For instance, investors yanked $587.2 million out of USO in April, according to ETF.com.
For now, Weinberg argues that the supply and demand fundamentals have not improved, with economic data out of he U.S. and China suggesting weakening demand and supply remaining elevated, especially as Iran and Libya work on pumping more into the global market.
“The supply and demand situation is quite bleak at the moment,” Weinberg added. “At the moment, the market is more thinking in terms of the prices, than concentrating on fundamentals.”
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]
Some have already shifted into the inverse ETFs over April in anticipation of a pullback. For instance, DWTI attracted $136.1 million in net inflows and SCO brought in $67.1 million.
For more information on the oil markets, visit our oil category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.