After the Organization of Petroleum Exporting Countries decided to keep the crude oil pumps flowing, energy-related exchange traded funds plunged, with oil prices near the financial depression lows.
West Texas Intermediate crude oil futures fell 5.2% to $37.9 per barrel on Monday while Brent crude oil futures were 4.7% lower to $41.0 per barrel. The last time oil prices traded around these levels was during the financial downturn after the collapse of Lehman Brothers.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, declined 5.9% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, decreased 5.7% on Monday. Both crude oil futures-backed ETFs were trading at all-time lows. Unlike the crude oil spot prices, USO and BNO track near month futures contracts and roll the contracts before expiry, which may leave the funds vulnerable to contango. [Widening Contango Could Cut Into Popular Oil ETF’s Returns]
Meanwhile, in the U.S. equities market, energy was the worst performing sector on Monday, with the Energy Select Sector SPDR (NYSEArca: XLE) down 4.3%.
On the other hand, investors who hedged oil exposure were capitalizing on the energy market’s misfortunes. For instance, the simple inverse United States Short Oil (NYSEArca: DNO) was 6.5% higher Monday while the DB Crude Oil Short ETN (NYSEArca: SZO) was up 4.7%. 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. SCO advanced 11.8%, DTO jumped 10.0% and DWTI surged 17.6%. [Don’t Bet on an OPEC Boost for Oil ETFs]
Crude oil prices fell to their lowest levels since early 2009 after OPEC’s meeting Friday 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.
OPEC’s production could continue to rise in 2016 if sanctions on Iran are lifted, which would allow the country to raise exports.
“We’re in a tug-of-war between a heavily shorted market and a glut of oil in the U.S. and globally, as Saudi Arabia continues to produce oil at elevated levels to maintain market share,” Chris Jarvis at Caprock Risk Management, told Reuters.
Additionally, the markets anticipate the Federal Reserve will announce rate hikes next week, which would strengthen the U.S. dollar and weigh on commodities. [Fed Fans Flame on Inverse Commodity ETFs]
“Couple this with a strengthening dollar as the market anticipates a U.S. rate hike this month, oil is heading lower with a near term target of $32 for WTI,” Jarvis added.
For more information on the crude oil market, visit our oil category.
Max Chen contributed to this article.