How Low Can Oil Go And Which ETFs Could Benefit From A Drop?

With West Texas Intermediate crude oil currently trading around $27 a barrel, this month’s historic flush in oil prices has some financial experts concerned that crude will settle in a range under $40 a barrel, resulting in potential layoffs for the industry’s hundreds of thousands of workers.

“A sustained drop in oil prices would cost the sector 50,000-75,000 jobs if employment returned to its low from a few years ago,” Nathan Sheets, chief economist at PGIM Fixed Income, wrote in an email to CNBC.

“During the downturn in 2015/16, U.S. employment in the oil sector fell by about one-third. In recent years, some of that has been clawed back, but a period of sustained low oil prices would no doubt push employment back toward previous troughs,” he added.

Oil prices dropped below $30 a barrel during Monday’s violent trading session as crude followed the Dow Jones Industrial Average downward. The world’s top oil producers, Saudi Arabia and Russia are still locking horns in a price war that is keeping prices low.

As market analysts continue to forecast lower demand for oil as a result of the coronavirus, this could lead to a massive supply glut. One energy strategist, Andreas De Vries is even exploring the possibility of $10 per barrel oil, admonishing companies to avoid a quick recovery in the sector.

De Vries explained, “The worst thing oil companies can do in the current environment is to assume that things will soon return to normal, and thus continue normal operations. Whatever the 2019 business plans for 2020 said, they are unlikely to have been based on the current market reality and need to be ignored.

New short-term operating plans need to be developed with the greatest urgency, assuming a further decline in the oil price possible to as low as $10 per barrel. Capex plans are to be reviewed on a similar basis.”

“The last time that there was a global surplus of this magnitude was never. Prior to this, the largest six-month global surplus this century was 360 million barrels. What is coming will be twice that or more,” said Jim Burkhard, vice president and head of oil markets at IHS Markit.

“Crude has become a bigger problem for markets than the coronavirus,” Adam Crisafulli, founder of Vital Knowledge, said earlier this month. “It will be virtually impossible for the [S&P 500] to sustainably bounce if Brent continues to crater,” he added.

So which ETFs stand to gain as oil continues to fall? The ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the DB Crude Oil Double Short ETN (DTO), and the ProShares Daily 3x Inverse Crude ETN (DNO) are all funds that allow investors to play the downside of the oil market. Year-to-date, SCO has gained almost 174%, up 11.6% just Tuesday.

For more market trends, visit  ETF Trends.