The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, has tumbled 10.5% over the past two weeks and technical analysis of crude oil charts points to more downside for the commodity.
That after oil rallied earlier this week in what could prove to be no more than a short-lived bounce. Analysts attributed Monday’s strength to technical trading after oil prices dipped toward the $40 a barrel, a level last seen in August amid concerns over China’s economy, the Wall Street Journal reports.
According to the CME Group, traders held over 20,000 December put option contracts at $40, giving them the right to sell a Nymex futures contract if the price falls to the level. The December contracts expired Tuesday, so traders would be closing out positions ahead of the expiry date.
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]
“Todd Gordon of TradingAnalysis.com begins by noting that in the financial crisis, crude oil fell 77 percent from its highs,” according to CNBC.
“Technicals say that in a good, solid pullback we should see an equal-leg push in the current move lower,” Gordon said Wednesday on CNBC’s “Power Lunch.” “A 77 percent drop from the reactionary high up at about $114 puts us at $26 in the crude oil market.”
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. [ETFs to Hedge Against a Grim Oil Outlook]
United States Oil Fund
