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Oil to Stay "Lower for Longer"? Short Oil & Energy ETFs
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As the world is wondering whether the Organization of Petroleum Exporting Countries (OPEC) would be able to cut a deal over production freeze/curb later this month, OPEC’s latest oil price outlook came as a harsh warning. Lately, OPEC indicated that oil prices may not cross the mark of $60 per barrel until the end of the decade.
As per the new report, OPEC’s Reference Basket (ORB) price will hover around $40 per barrel on average this year, and the group expects the price to go up by $5 per barrel every year through the remainder of the decade. If the trend continues, oil prices will likely reach $60 per barrel in 2020, down $20 projected last year. As per the source, this time OPEC went rather bearish from its usual bullish stance.
Why Such Bearish Price Projection?
The cartel initially thought that low oil prices would trigger demand. But “high household debt levels, fiscal imbalances and high unemployment, combined with industry investment cuts” did not let that expectation materialize. So, instead of a brighter outlook on global growth due to lower oil price, the overall impact turned out to be neutral, going by the report.
On the other hand, supplies remained solid on productivity gains and cost reductions. Though the U.S. has seen a decline in rig count in recent times, capital markets are still flexible to provide loans to drillers, averting a crash in output. But OPEC has now increased its longer-term estimate for global shale production from 5.61 mb/d by 2030 to 6.73 mb/d, sensing that the decline in output has bottomed out, per the source (read: What Do Q3 Earnings Say About Oil Service ETFs?).
What About Future Demand?
OPEC beefed up its forecast for global oil demand next year to 95.3 million barrels a day, up 300,000 barrels a day from the prior forecast. The projection was raised through the end of the decade, expecting cheaper crude to boost consumption. The OPEC also raised its outlook for oil demand in 2018, 2019 and 2020, but that could not spur a rally in oil prices due to an even higher increase in supplies.
Investors should also note that OPEC raised oil demand outlook despite a decline in the global growth outlook to 3.4% a year for 2015 to 2021, compared with an annual 3.6% forecast last year for 2014 to 2020. A slowdown in China and Latin America was responsible for this cut (read: Oil ETFs: Short-Term Threat, Long-Term Opportunity?).
What’s in the Near Term?
The International Energy Agency (IEA) indicted that global oil markets will log the third consecutive year of supply glut in 2017 if the OPEC declines to cut production. OPEC produced a record high of 33.83 million barrels a day in October and is expected to overflow with oil this month as well. As of now, the OPEC deal seems dicey given Iraq and Iran’s reluctance in cutting it (read: Inverse Oil ETFs in Focus as Iraq Threatens OPEC Deal).
Whatever the case, for the near term, the crude market will be swinging with every new information and expectation of an output cut. If you really believe in the OPEC and IEA warnings, it is better to short oil and energy stocks with ETFs. Below we highlight a few options which stand to gain if oil fails to beat the $60 mark in the days to come (read: 5 ETFs for Those Who Believe the Oil Rally is Over):
Short Oil
United States Short Oil Fund
The fund seeks to match the inverse performance of the spot price of light sweet crude oil WTI. It charges 60 bps in fees per year from investors.
The fund tracks the Bloomberg WTI Crude Oil Subindex to provide twice the inverse performance, on a daily basis of WTI crude oil. The fund charges 95 bps in fee exposure (see all Inverse Commodity ETFs here).
VelocityShares 3x Inverse Crude ETN
DWTI is one of the riskier ways to play the short oil market, utilizing -3x exposure with daily rebalancing. The expense ratio of the product is 1.35%.
Short Energy
ProShares Short Oil & Gas ETF
This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The ETF makes a profit when energy stocks decline and is suitable for hedging purposes against the fall of these stocks. The fund charges 95 bps in fees.
Image: Bigstock
Oil to Stay "Lower for Longer"? Short Oil & Energy ETFs
As the world is wondering whether the Organization of Petroleum Exporting Countries (OPEC) would be able to cut a deal over production freeze/curb later this month, OPEC’s latest oil price outlook came as a harsh warning. Lately, OPEC indicated that oil prices may not cross the mark of $60 per barrel until the end of the decade.
As per the new report, OPEC’s Reference Basket (ORB) price will hover around $40 per barrel on average this year, and the group expects the price to go up by $5 per barrel every year through the remainder of the decade. If the trend continues, oil prices will likely reach $60 per barrel in 2020, down $20 projected last year. As per the source, this time OPEC went rather bearish from its usual bullish stance.
Why Such Bearish Price Projection?
The cartel initially thought that low oil prices would trigger demand. But “high household debt levels, fiscal imbalances and high unemployment, combined with industry investment cuts” did not let that expectation materialize. So, instead of a brighter outlook on global growth due to lower oil price, the overall impact turned out to be neutral, going by the report.
On the other hand, supplies remained solid on productivity gains and cost reductions. Though the U.S. has seen a decline in rig count in recent times, capital markets are still flexible to provide loans to drillers, averting a crash in output. But OPEC has now increased its longer-term estimate for global shale production from 5.61 mb/d by 2030 to 6.73 mb/d, sensing that the decline in output has bottomed out, per the source (read: What Do Q3 Earnings Say About Oil Service ETFs?).
What About Future Demand?
OPEC beefed up its forecast for global oil demand next year to 95.3 million barrels a day, up 300,000 barrels a day from the prior forecast. The projection was raised through the end of the decade, expecting cheaper crude to boost consumption. The OPEC also raised its outlook for oil demand in 2018, 2019 and 2020, but that could not spur a rally in oil prices due to an even higher increase in supplies.
Investors should also note that OPEC raised oil demand outlook despite a decline in the global growth outlook to 3.4% a year for 2015 to 2021, compared with an annual 3.6% forecast last year for 2014 to 2020. A slowdown in China and Latin America was responsible for this cut (read: Oil ETFs: Short-Term Threat, Long-Term Opportunity?).
What’s in the Near Term?
The International Energy Agency (IEA) indicted that global oil markets will log the third consecutive year of supply glut in 2017 if the OPEC declines to cut production. OPEC produced a record high of 33.83 million barrels a day in October and is expected to overflow with oil this month as well. As of now, the OPEC deal seems dicey given Iraq and Iran’s reluctance in cutting it (read: Inverse Oil ETFs in Focus as Iraq Threatens OPEC Deal).
Whatever the case, for the near term, the crude market will be swinging with every new information and expectation of an output cut. If you really believe in the OPEC and IEA warnings, it is better to short oil and energy stocks with ETFs. Below we highlight a few options which stand to gain if oil fails to beat the $60 mark in the days to come (read: 5 ETFs for Those Who Believe the Oil Rally is Over):
Short Oil
United States Short Oil Fund
The fund seeks to match the inverse performance of the spot price of light sweet crude oil WTI. It charges 60 bps in fees per year from investors.
ProShares UltraShort Bloomberg Crude Oil ETF (SCO - Free Report)
The fund tracks the Bloomberg WTI Crude Oil Subindex to provide twice the inverse performance, on a daily basis of WTI crude oil. The fund charges 95 bps in fee exposure (see all Inverse Commodity ETFs here).
VelocityShares 3x Inverse Crude ETN
DWTI is one of the riskier ways to play the short oil market, utilizing -3x exposure with daily rebalancing. The expense ratio of the product is 1.35%.
Short Energy
ProShares Short Oil & Gas ETF
This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The ETF makes a profit when energy stocks decline and is suitable for hedging purposes against the fall of these stocks. The fund charges 95 bps in fees.
ProShares UltraShort Oil & Gas ETF (DUG - Free Report)
This fund seeks two times (2x) leveraged inverse exposure to the Dow Jones U.S. Oil & Gas Index. DUG charges 95 bps in fees.
Direxion Daily Energy Bear 3x Shares ETF (ERY - Free Report)
This product provides three times (3x) inverse exposure to the Energy Select Sector Index. The fund charges 95 bps in fees.
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