Crude oil prices and commodity-related exchange traded funds plunged Tuesday after talks of a production cut between Organization of Petroleum Exporting Countries and non-OPEC members fell through.
On Tuesday, the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, declined 4.6% and the United States Brent Oil Fund (NYSEArca: BNO), which tracks Brent crude oil futures, decreased 4.1%. Year-to-date, USO fell 19.0% and BNO dropped 10.4%.
West Texas Intermediate crude oil futures pulled back 4.9% to $31.8 per barrel and Brent crude oil futures were 4.1% lower to $33.3 per barrel on Tuesday after energy prices bounced in the previous session on data that revealed U.S. drilling rig numbers slipped to the lowest level since December 2009.
On the other hand, investors who hedged oil exposure were capitalizing on the energy market’s turn. For instance, the simple inverse United States Short Oil (NYSEArca: DNO) was 4.5% higher Tuesday. 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 Tuesday, SCO advanced 8.2%, DTO jumped 7.1% and DWTI surged 13.7%.
Oil prices retreated after Saudi Oil Minister Ali Al-Naimi ruled out production cuts, arguing that demand will eventually pick up to cover the elevated output, reports Jessica Resnick-Ault for Reuters.
Previously, large oil exporters like Saudi Arabia and Russia have proposed to freeze output near January levels if other countries also followed suit. Oil producers will meet to go over potential freezes in March.
However, market observers are skeptical that the cuts will help support oil prices.
“If they freeze production at January levels when you’re already over supplied by around a million barrels per day it just prolongs that situation of oversupply,” Energy Aspects’ analyst Dominic Haywood told Reuters.
Moreover, Iran, which is now free of western sanctions, will likely increase oil exports.
Iranian Oil Minister Bijan Namdar Zanganeh said the freeze output was “ridiculous” since it puts “unrealistc demands” on Iran, reports Mark Shenk for Bloomberg.
“Zangaheh and Naimi have managed to deflate traders’ expectations that there would be an agreement to cut production anytime soon,” Michael Lynch, president of Strategic Energy & Economic Research, told Bloomberg. “There’s a lot of hard bargaining and additional economic pain that’s going to have to occur before an agreement is reached.”
United States Short Oil
Max Chen contributed to this article.