Crude oil-related exchange traded funds continued to slip Tuesday, with West Texas Intermediate oil trading below $30 per barrel for the first time in over a decade, and observers warn there may be more pain ahead.
On Tuesday, 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, dropped 3.1%.
Meanwhile,WTI futures were down 3.5% to $30.3 after briefly dipping to $29.97 per barrel, its weakest level since December 2003, Reuters reported. Brent oil futures were 2.6% lower to $30.7 per barrel after slipping to an intra-day low of $30.4 per barrel, its lowest since April 2004.
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.
Morgan Stanley pointed out that oil is leveraged to the dollar and may fall between 10% to 25% if the greenback appreciates 5%, reports Ben Sharples for Bloomberg.
The analysts argue that while the global supply glut has dragged oil below $60 per barrel, the stronger dollar accounts for the difference between a $35 per barrel and $55 per barrel price.
“Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency,” the Morgan Stanley analysts said in a note. “The U.S. dollar and non-fundamental factors continue to drive oil prices.”
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]
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. Over the past three months, SCO increased 155.4%, DTO advanced 151.9% and DWTI surged 302.2%.
Max Chen contributed to this article.