Inverse Crude ETFs Surge As Interest Worries Drive Price Lower

After attempting a run higher in the prior session, crude oil futures fell over 3% on Thursday. This caused a surge in inverse crude ETFs like ProShares UltraShort Bloomberg Crude Oil (SCO), amid investor worries over the effect of a significant Bank of England interest rate hike.

Investors were motivated to buy oil after the weekly report revealed a surprise drawdown in U.S. oil supplies. There were also skyrocketing agricultural prices. This could potentially increase oil demand, interest rate fears quickly overshadowed those buying inclinations.

Brent futures fell $2.93, or 3.8%, to $74.47 after 1230PM EST. Meanwhile, U.S. West Texas Intermediate (WTI) crude futures tumbled over $3, or 4.40%, to $69.33 a barrel.

Gasoline stocks added about 480,000 barrels in the week to 221.4 million barrels, according to a report from the EIA. According to a Reuters poll, this was in comparison with analysts’ projections for a 100,000-barrel rise.

“Given the decline in crude oil and the modest increases in refined products inventories, I would have thought we would get a better response from the market. But the crude oil market is being weighed down by higher interest,” said Andrew Lipow, president of Lipow Oil Associates.

The Fed’s Take On Crude Oil

Fed Chair Jerome Powell is set to continue with his congressional testimony on Thursday. This could have an additional effect on oil prices.

“We expect Fed Chair Powell to deliver a hawkish semi-annual testimony to Congress. This would reflect the FOMC’s median projection for higher interest rates in coming months and more resilient inflation in the near term,” ANZ said in a note, according to Reuters.

Crude oil volatility has narrowed over recent months. The commodity settled into a trading range, providing opportunities for buyers and sellers.

Softening inflation could be a boon for ETF traders who favor crude oil. Crude ETFs like the United States Oil Fund (USO)which is 3.87% lower today amid the decline in oil futures, as well as the ProShares Ultra Bloomberg Crude Oil (UCO), down over 7.44%, could see meaningful gains if inflation falls. Meanwhile, short ETFs like the ProShares UltraShort Bloomberg Crude Oil (SCO), which is approaching an 8% gain Thursday, could benefit under continuing inflation and rising prices.

For investors looking for crude ETFs to play a rally in oil, the United States 12 Month Oil Fund (USL) and the iPath Pure Beta Crude Oil ETN (OIL) are two other funds to consider.

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