Oil futures and the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, each slumped 10% with USO joining several other oil-based exchange traded products in the all-time low club.
Crude oil prices fell to their lowest levels since early 2009 after OPEC’s meeting earlier this month ended without an agreement to lower production, Reuters reports. OPEC has been fueling a global supply glut in an attempt to maintain market share and squeeze out high-cost oil producers, such as the nascent shale industry in the U.S.
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]
Additionally, falling crude oil prices will also drag on the energy sector. For those seeking a hedge against further declines in the energy stocks, the ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse, or -100%, daily performance of the Dow Jones U.S. Oil & Gas Index.
However, traders should exercise caution with these ETFs because some market observers believe oil is close to reaching a bottom.
“The seeming dissolution of the Organization of Petroleum Exporting Countries prompted oil to end this week on a poor note, and more negative catalysts proceeded to emerge. Forecasts of a milder winter, the Venezuelan elections, and the start of a five-day ‘contract roll’ period have all combined to add to the selling pressure, according to Credit Suisse, but this rout may have nearly concluded,” reports Luke Kawa for Bloomberg.
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.
Earlier this year, Goldman Sachs said a failure to quickly cut production now could drive oil prices to $20 per barrel.
“Demand is rising and supply is falling. Globally, the oil market will start drawing down on this year’s massive inventory builds around the middle of 2016, he estimates, which should help propel crude prices higher,” Bloomberg reports, citing Credit Suisse.
United States Oil Fund
