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How to Trade Oil with ETFs After Surging U.S. Output
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Pouring cold water on hopes building on the OPEC output cut deal and the expected stabilization in the oil patch, U.S. crude production is marching ahead. The Department of Energy showed on March 8, 2017 that crude supplies have increased 8.21 million barrels from the previous week to 528.4 million barrels. This was the highest level since record keeping started in 1982. The addition to storage marked a four times increment to what analysts projected.
Weekly figures also indicate that U.S. oil production is on its way toward 9.1 million barrels a day, the highest level in over a year. This spurt in inventory shoved oil prices southward to an almost three-month low $50-level on higher trading volumes. It was the largest daily percentage drop in oil prices since February 2016. WTI crude ETF United States Oil (USO - Free Report) lost over 5.3% on March 8 while Brent crude oil ETF United States Brent Oil (BNO - Free Report) shed more than 4.8%.
This was expected. The U.S. rig count has steadily been trending upward. Total rig count in North America – the U.S. and Canada – for February 2017 was 1,086. The reported figure was higher than the January 2017 count of 985 as well as the year-ago level of 743. Activity in the Permian basin gained impetus in recent times.
As per market watchers, U.S. capital markets still have the option to provide loans to drillers, averting a crash in output. Added to this, President Trump is also in favor of higher shale oil production.
What Lies Ahead?
Things do not look too promising for oil prices right now. On March 7, Saudi Oil Minister Khalid al-Falih signaled that the country would only care for OPEC's intervention in markets for a "restricted period of time" and would not "underwrite the investments of others” at their “own expense and long-term interests."
Investors should note that OPEC had decided to cut production by about 1.2 million barrels a day by January. Plus, on December 10, OPEC cut the first deal with non-OPEC since 2001 to reduce output this year. These pacts were formed for six months (read: Top ETF Stories of the Fourth Quarter).
Saudi Arabia has so far been responsible for most of the output cut. Iraq, OPEC's second largest producer, however drilled above its quota in January, per the source. So, it can be said that there is a slight lack in unity in the OPEC output cut deal signed in late 2016 (read: How Effective is the OPEC Deal for an Oil ETF Rally?).
If this was not enough, a rising greenback on possibilities of faster Fed rate hikes this year may hurt overall commodity investing including oil. Moreover, the OPEC deal is less commanding this time than it was in 2008 amounting to 4.2 million bpd.
Many believe that the present $50-oil level is probably the target of oil producers. The OPEC deal is probably not sufficient to raise oil prices. If oil prices fall below $50, participants may mull over extending the OPEC agreement for six more months (read: Can Oil ETFs Rebound on Possibility of More OPEC Cuts?).
Bottom Line
Having said all, the likelihood of any protracted deal is still less, especially given the fact that only OPEC has “outperformed its compliance record, while non-OPEC [countries have] only cut about half of proposed cuts” and the U.S. is continuing to pump up more oil.
So, there are less chances of oil prices outperforming this level. For the longer term, it is better to sit on the sidelines. And investors who are eyeing to cash in on the latest slump or expecting more declines in this liquid commodity, can short oil and energy ETFs. Below we highlight a few choices (read: Oil to Stay "Lower for Longer"? Short Oil & Energy ETFs):
Short Oil
ProShares UltraShort Bloomberg Crude Oil (SCO - Free Report) – Up 10.4% on March 8
SCO tracks the Bloomberg WTI Crude Oil Subindex to provide twice the inverse performance, on a daily basis of WTI crude oil (see all inverse commodity ETFshere).
United States Short Oil Fund – Up 5.6% on March 8
The fund seeks to match the inverse performance of the spot price of light sweet crude oil.
Short Energy Stocks
ProShares Short Oil & Gas ETF – Up 2.9% on March 8
This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The index looks to track the performance of the energy sector of the U.S. equity market.
ProShares UltraShort Oil & Gas ETF (DUG - Free Report) – Up 5.2% on March 8
This fund seeks two times (2x) leveraged inverse exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index.
Direxion Daily Energy Bear 3x Shares ETF (ERY - Free Report) – Up 7.7% on March 8
This product provides three times (3x) inverse exposure to the Energy Select Sector Index.
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How to Trade Oil with ETFs After Surging U.S. Output
Pouring cold water on hopes building on the OPEC output cut deal and the expected stabilization in the oil patch, U.S. crude production is marching ahead. The Department of Energy showed on March 8, 2017 that crude supplies have increased 8.21 million barrels from the previous week to 528.4 million barrels. This was the highest level since record keeping started in 1982. The addition to storage marked a four times increment to what analysts projected.
Weekly figures also indicate that U.S. oil production is on its way toward 9.1 million barrels a day, the highest level in over a year. This spurt in inventory shoved oil prices southward to an almost three-month low $50-level on higher trading volumes. It was the largest daily percentage drop in oil prices since February 2016. WTI crude ETF United States Oil (USO - Free Report) lost over 5.3% on March 8 while Brent crude oil ETF United States Brent Oil (BNO - Free Report) shed more than 4.8%.
This was expected. The U.S. rig count has steadily been trending upward. Total rig count in North America – the U.S. and Canada – for February 2017 was 1,086. The reported figure was higher than the January 2017 count of 985 as well as the year-ago level of 743. Activity in the Permian basin gained impetus in recent times.
As per market watchers, U.S. capital markets still have the option to provide loans to drillers, averting a crash in output. Added to this, President Trump is also in favor of higher shale oil production.
What Lies Ahead?
Things do not look too promising for oil prices right now. On March 7, Saudi Oil Minister Khalid al-Falih signaled that the country would only care for OPEC's intervention in markets for a "restricted period of time" and would not "underwrite the investments of others” at their “own expense and long-term interests."
Investors should note that OPEC had decided to cut production by about 1.2 million barrels a day by January. Plus, on December 10, OPEC cut the first deal with non-OPEC since 2001 to reduce output this year. These pacts were formed for six months (read: Top ETF Stories of the Fourth Quarter).
Saudi Arabia has so far been responsible for most of the output cut. Iraq, OPEC's second largest producer, however drilled above its quota in January, per the source. So, it can be said that there is a slight lack in unity in the OPEC output cut deal signed in late 2016 (read: How Effective is the OPEC Deal for an Oil ETF Rally?).
If this was not enough, a rising greenback on possibilities of faster Fed rate hikes this year may hurt overall commodity investing including oil. Moreover, the OPEC deal is less commanding this time than it was in 2008 amounting to 4.2 million bpd.
Many believe that the present $50-oil level is probably the target of oil producers. The OPEC deal is probably not sufficient to raise oil prices. If oil prices fall below $50, participants may mull over extending the OPEC agreement for six more months (read: Can Oil ETFs Rebound on Possibility of More OPEC Cuts?).
Bottom Line
Having said all, the likelihood of any protracted deal is still less, especially given the fact that only OPEC has “outperformed its compliance record, while non-OPEC [countries have] only cut about half of proposed cuts” and the U.S. is continuing to pump up more oil.
So, there are less chances of oil prices outperforming this level. For the longer term, it is better to sit on the sidelines. And investors who are eyeing to cash in on the latest slump or expecting more declines in this liquid commodity, can short oil and energy ETFs. Below we highlight a few choices (read: Oil to Stay "Lower for Longer"? Short Oil & Energy ETFs):
Short Oil
ProShares UltraShort Bloomberg Crude Oil (SCO - Free Report) – Up 10.4% on March 8
SCO tracks the Bloomberg WTI Crude Oil Subindex to provide twice the inverse performance, on a daily basis of WTI crude oil (see all inverse commodity ETFshere).
United States Short Oil Fund – Up 5.6% on March 8
The fund seeks to match the inverse performance of the spot price of light sweet crude oil.
Short Energy Stocks
ProShares Short Oil & Gas ETF – Up 2.9% on March 8
This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The index looks to track the performance of the energy sector of the U.S. equity market.
ProShares UltraShort Oil & Gas ETF (DUG - Free Report) – Up 5.2% on March 8
This fund seeks two times (2x) leveraged inverse exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index.
Direxion Daily Energy Bear 3x Shares ETF (ERY - Free Report) – Up 7.7% on March 8
This product provides three times (3x) inverse exposure to the Energy Select Sector Index.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>