Expiring crude oil futures contracts and storage tanks nearing capacity exacerbated a sell-off in oil and commodity-related exchange traded funds Wednesday.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, declined 5.7% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, decreased 5.0% on Wednesday. Meanwhile, WTI crude oil futures fell 6.6% to $26.6 per barrel while Brent crude oil futures dropped 4.7% to $27.4 per barrel.
On the other hand, investors who hedged oil exposure were capitalizing on the carnage. For instance, the simple inverse United States Short Oil (NYSEArca: DNO) was 6.3% higher Wednesday while the DB Crude Oil Short ETN (NYSEArca: SZO) was up 3.3%.
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. On Wednesday, SCO advanced 11.6%, DTO jumped 5.9% and DWTI surged 16.3%.
Oil prices were at their intra-day lowest since 2003 on Wednesday as the ongoing global supply glut kept the market depressed. John Kilduff, founding partner at Again Capital, argued that the catalyst for the latest selling was due to the expiration of the February contract at the end of Wednesday’s session, CNBC reports.
The ongoing supply glut has filled energy storage space, including those at the Cushing, Oklahoma delivery point for WTI. Consequently, futures bidders are unlikely to take February contracts for physical delivery without a substantial discount.
“This condition at the hub could wreak havoc until the close of trading of this contract,” Kilduff told CNBC.
Meanwhile, on the demand side, China, which consumes about 12% of the world’s crude oil, could see lower demand as economy shifts to a less energy-intensive economic model, the Wall Street Journal reports.
Consequently, the markets may be in for an extended low oil environment. The International Energy Agency also recently warned that the world could “drown in oversupply” of oil in 2016, especially as Iran’s exports begin flowing into global markets.
The U.S. Energy Information Administration will reveal U.S. crude oil stocks Thursday, a day late due to the Monday holiday.
United States Oil Fund
Max Chen contributed to this article.