Oil futures rose modestly Wednesday, but it is going to take more than modest gains to spark the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, fell 3.0% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, to significant upside.
In fact, significant upside appears to be a far-flung notion for oil and the related exchange traded products as bearish forecasts for crude keeping piling up. While crude oil prices are breaking down, Wall Street analysts anticipate further weakness ahead. Morgan Stanley analysts, including Adam Longson, head of energy commodity research, argue that investors are putting too much emphasis on fundamental factors and are not paying attention to an appreciating U.S. dollar.
Goldman Sachs Group has also forecasted oil to drop to $20 per barrel but attributes further weakness to potential storage tank limits as producers keep pumping until they completely fill up storage space and halt some production.
Whichever the case may be, 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. Over the past three months, DNO gained 64.9% and SZO rose 64.5%. [Leveraged ETFs Are Popular Plays Among Swing Traders]
Barclays “expects both Brent and WTI crude to average $37/bbl in 2016, down from a previous forecast of $60 and $56, respectively, citing the “complete breakdown of OPEC cohesion” and U.S. shale producers that have proved to be ‘resilient beyond expectations,’” according to a Seeking Alpha brief.
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]
“BofA Merrill Lynch is the runnerup for most pessimistic, forecasting WTI to average $45/bbl this year; Morgan Stanley yesterday argued that scenarios with crude as low as $20/bbl are possible, but that is not its 2016 base forecast, as the bank expects crude to average $47.50 this year,” adds Seeking Alpha.
United States Oil Fund
