ETF Trends
ETF Trends

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has shed more than 33% of its value over the past six months and there is cacophony of bearish calls on crude. So bullish calls assuredly look bold, but some commodities investors may be surprised to learn just how bullish some market participants are on crude.

The Organization of Petroleum Countries has kept up production to pressure high-cost rivals, such as the developing U.S. shale oil producers. The International Energy Agency expects it will take several years before OPEC can effectively price out high-cost producers. [Oil ETFs Face World-Record Supply Glut]

In the face of the rising global supply glut, investors can utilize a number of inverse or bearish ETF options to hedge against further declining energy prices. For instance, the United States Short Oil (NYSEArca: DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, and the DB Crude Oil Short ETN (NYSEArca: SZO) also tracks the simple inverse of oil. [Leveraged ETFs Are Popular Plays Among Swing Traders]

“According to Emad Mostaque, a strategist at consulting company Ecstrat, crude oil is now trading at what is known as “half cycle costs”; that is, roughly the cost of getting the oil out of the ground,” reports CNBC. “His point is that $42 oil does not account for other important costs like that of finding the oil or purchasing the land in which the crude is situated. That would imply that the supply of oil will dry up over time.”

Crude oil-related exchange traded funds are continuing their downward spiral as the global supply glut distends on increased production out of the Organization of Petroleum Exporting Countries. There are reasons for investors to be cautious with volatile energy ETFs. Moreover, if oil prices falls to new lows and the shale industry is unable to turn a profit, the highly leveraged industry may find it harder to repay debt obligations.

Investors should be careful of getting caught up in oil’s recent strength because the commodity is still in a bear market and expectations for a significant recovery are muted. Looking ahead, we may be in for low oil prices for much longer than many anticipated.

“Further, the market is extremely susceptible to geopolitical risks, he said. This is because there is no “geopolitical premium” baked into current prices, and yet falling oil prices could themselves create instability in one or more oil-producing nations,” adds CNBC.

United States Oil Fund

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.