The energy market and oil exchange traded funds may have more room to fall and will continue to stay depressed for a longer period as high production keeps a lid on prices.
Year-to-date, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, fell 13.0% and United States Brent Oil Fund (NYSEArca: BNO) declined 8.5%.
WTI crude oil futures are hovering around $53 per barrel while Brent crude was trading around $59 per barrel.
The International Energy Agency warned that oil prices can continue to decline as the world remains “massively oversupplied” before markets tighten in 2016 once production growth outside of the Organization of Petroleum Exporting Countries falls, reports Grant Smith for Bloomberg.
“The rebalancing that began when oil markets set off on an initial 60 percent price drop a year ago has yet to run its course,” according to an IEA report. “Recent developments suggest that the process will extend well into 2016.”
The IEA projects that there will be no oil output growth outside of OPEC for the first time since 2008 on a drop in more costly drilling projects, such as those in U.S. shale oil beds and in Russia.
The agency warned that while “cost savings, efficiency gains and producer hedging” have helped shale drillers weather the current storms, U.S. operations are not sustainable at current prices, which could cause production growth to slow to 300,000 barrels per day in 2016 from 900,000 a day in 2015.
Additionally, the agency argues that global oil demand growth will also slow down to 1.2 million barrels a day in 2016 from 1.4 million a day this year, further weighing on oil prices.
“In the short term, the report is definitely bearish” because of its assessment of a massive surplus, Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., told Bloomberg.
Consequently, if energy market continues to dip, oil traders can utilize inverse ETFs to hedge bets. 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. [Inverse ETFs to Hedge Against Hurdles Ahead]
“The bottom of the market may still be ahead,” the IEA said. “Non-OPEC supply growth is expected to grind to a halt in 2016 as lower oil prices and spending cuts take a toll.”
For more information on the oil market, visit our oil category.
Max Chen contributed to this article.