ETF Trends
ETF Trends

The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, is up 5% over the past month and its gains are rapidly evaporating, lending efficacy to the notion that oil and the related exchange traded funds rallied too far too fast.

There might be something to that skepticism as many of the world’s major ex-U.S. producers of oil have not displayed a willingness to pare production. Even the output reductions in the U.S. have been modest. The good news is U.S. shale output is slightly declining, but challenges remain on the output front from OPEC producers.

OPEC has hinted at its desire to limit production in face of the prolonged low oil environment. However, Iran, which has just recently re-entered the global oil market, is only just starting to ramp up production, potentially putting a damper on plans for a OPEC cut.

Oil Price Information Service’s Tom Kloza told CNBC “investors shouldn’t bank on a long-term rally for the commodity anytime soon.”

Several OPEC members and Russia, the largest non-OPEC member, have been mulling production cuts, but without Saudi Arabia taking the lead on that front, oil could still face output issues.

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Qatar, Russia, Saudi Arabia and Venezuela have been in discussions to hold output steady at January levels, but only if other producers followed suit. Russia is the largest non-OPEC producer of oil and natural gas, though the country prefers higher prices even more so than Saudi Arabia.

Oil’s “14-day RSI recently cycled into overbought territory, a sign for buyers to take their foot off the gas (pun intended). The daily MACD is also rolling over. Commercial hedgers (smart money), which recently had their most bullish exposure in the past 3 years, have started to lower their exposure of late. This could be an early warning that this move into the $40’s may be it for this initial rally. Sentiment has improved, but has not yet reached neutral territory. All in all, this may lead to a pullback for crude oil and related energy stocks,” according to See It Market.

Traders looking to profit from falling oil prices have plenty of ETF 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.

United States Oil Fund

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.