Amid another surge in inventories and expectations for slack global economic growth, the United States Oil Fund (NYSEArca: USO) is off nearly 12% over the past two weeks.
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.
USO has been somewhat steady following a sharp reversal in September that forced a spate of short covering. A short position is a sale on a borrowed security. The investor needs to eventually return the borrowed stock by purchasing it back from the open market. If the price falls, the investor buys it back for less than he or she sold it for and pockets the profit. [Widening Contango Could Cut Into Popular Oil ETF’s Returns]
“Crude oil prices hit the trend line nicely and bounced from 37.50 to 50 bucks. I see this as a 3 wave move up into 50 but, perhaps, another move higher is needed to complete the pattern? So what is the crude oil lower price target to set up such a move? For me that key level is roughly $40 on crude,” according to technical analysis of oil futures on See It Market.
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.
Specifically, USO tracks near month crude oil futures, swapping out contracts within two weeks of expiration for the next month contract. Consequently, in a contangoed market, USO would essentially be selling low and buying high, which may cut into performance. [Positioning for an Oil ETF Rebound? Watch For Contango.]
For the more aggressive trader, there are number of leveraged options, including the ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO), which tries to reflect the two times inverse or -200% daily performance of WTI crude oil, and DB Crude Oil Double Short ETN (NYSEArca: DTO), which also follows a -200% performance of oil, jumped 17.4%. Lastly, the VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil.
United States Oil Fund
