Even with Wednesday’s surge, oil futures still languish below $38 per barrel and the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is still lower by nearly 45% this year.
A significant part of oil’s problems this year is attributable to the Organization of Petroleum Exporting Countries (OPEC) refusing to cut production in an effort to stem slumping prices. However, OPEC still has plenty of skin in the game, hence the cartel’s bullish prediction on crude prices.
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]
IEA believes supplies outside of OPEC will dip next year by the most since 1992 as cheap crude helps price out costlier producers, such as the U.S. shale oil industry.
“OPEC early Wednesday released its closely watched World Oil Outlook, saying it expects the price of its basket of crude to rise to $70 a barrel in 2020 and to $95 a barrel in 2040,” report Sara Sjolin and Jenny Hsu for MarketWatch.
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. The IEA said the “massive cushion has inflated” on record supplies from Iraq, Russia and Saudi Arabia.
“Moreover, unless there is a significant cut in output, the chronic issue of supply outstripping demand will continue to weigh on global prices well into next year, especially with additional Iranian oil returning to the market in the coming months, analysts said,” according to MarketWatch.
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]
United States Oil Fund
