Oil exchange traded funds erased early losses Monday, with West Texas Intermediate crude oil futures rallying, after crude prices flirted with the psychologically key $40-per-barrel level.
On Monday, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, gained 2.6% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, rose 1.0%.
Nymex WTI crude oil futures were up 3.2% to 42.0 per barrel on Monday while ICE Brent Crude futures were up 0.9% to $44.9 per barrel.
Meanwhile, leveraged oil ETFs also shot up on the action. On Monday, the ProShares Ultra Bloomberg Crude Oil (NYSEArca: UCO), which takes two times or 200% daily performance of WTI crude oil, increased 5.4% and the VelocityShares 3x Long Crude ETN (NYSEArca: UWTI), which tracks three times or 300% the daily performance of WTI crude, jumped 8.1%. [Investors Capitalize on Oil Swings with Leveraged ETFs]
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 expire Tuesday, so traders would be closing out positions ahead of the expiry date.
The additional buying pressure may have helped support the slipping oil prices, which have been steadily declining as the global supply glut widens. The average price of crude sold by OPEC dipped to $39.21 per barrel on November 13, falling below $40 per barrel for first time since 2009 – the basket typically trades below international oil futures, reports Grant Smith for Bloomberg.
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]
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
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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.