The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is off 18.4% over the past month and oil futures closed below $40 per barrel Wednesday for the first time since August. All of that is to say investors should not expect much help for the commodity from this week’s meeting of the Organization of Petroleum Exporting Countries (OPEC).
OPEC 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]
“OPEC is widely expected to stick to its policies – enforced by Saudi Arabia’s oil minister Ali al-Naimi a year ago – of defending market share by pumping record volumes to drive rival, higher-cost producers out of the market,” reports Reuters. “While the Saudis can claim a partial victory over the U.S. shale oil boom, production from top non-OPEC rival Russia continues to surprise on the upside and OPEC members Iraq and Iran are set to add new barrels. World oil stockpiles are at a record, according to the International Energy Agency.”
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.