Not that leveraged exchange traded products should be held for long time frames, but if a trader had been brazen enough to hold the VelocityShares 3x Inverse Crude (NYSEArca: DWTI) for two years, that trader would be quite happy as DWTI has returned 715% over that period.
DWTI, which takes the three times inverse or -300% performance of crude oil, has clearly benefited from slumping crude prices and if some banks are correct in their bearish outlooks, DWTI could deliver more near-term gains.
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 forecast 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.
However, some traders have recently been taking profits in DWTI, sparking massive asset flight from the high-flying exchange traded note.
“Unknown investors in the VelocityShares 3x Inverse Crude Oil Exchange Traded Note (ETN) – which offers the ability to make a bearish bet on prices magnified threefold, with gut-churning ups and downs – bailed out early this week after jumping into the fund in January, ETN data show,” reports Reuters. “Some 1.8 million shares worth more than $602 million were redeemed on Tuesday, the largest outflow from the ETN in the past year, according to data from FactSet Research.”
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]
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.
DWTI “inversely tracks the S&P GSCI Crude Oil Index ER, which follows movements in the oil market. And because it offers investors three times the exposure, the impact on the underlying futures is magnified – as is the volatility in the ETN, whose price more than doubled in the first three weeks of January before halving again as oil futures rebounded,” according to Reuters.
VelocityShares 3x Inverse Crude
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.