Scalper1 News
Oil has become the most perplexing commodity this year with wild swings in recent weeks. The latest and worst culprit is the China meltdown with global repercussions that is weighing heavily on demand. Further, ever-increasing production and a large supply glut are tempering its appeal across the board. As the Fed kept the rates on hold at its latest meeting on Thursday, oil price tumbled about 5% the next day. This is because the Fed’s decision of no rates hike led to further worries over the health of the global economy and will likely put more pressure on the price of oil. Notably, both U.S. and Brent crude have plunged about 15% in the year-to-date time frame with some forecasting a bigger drop in the days ahead. In particular, Goldman predicts that crude price could slide to $20 per barrel if production cuts fail to clear supply glut and new investments in the oil shale industry are not reduced (read: ” Oil ETFs Slide Again: More Pain in Store? “). Behind the Lower Forecast The demand and supply dynamics for oil is becoming worse by the day. This is especially true, as the Organization of Petroleum Exporting Countries (OPEC) has pumped out maximum oil in more than three years to maintain market share. Iran is looking to boost its production once the Tehran sanctions are lifted and inventories continue being built up. Additionally, oil production in the U.S. is hovering around its record level and crude stockpiles remain about 100 million barrels above the five-year seasonal average. However, the International Energy Agency (IEA) believes that the recent oil slump would force both the U.S. and other non-OPEC producers like Russia and the North Sea to cut their production sharply next year. It expects non-OPEC supply to reduce by 0.5 million barrels per day, the biggest decline in more than two decades, to 57.7 million barrels per day next year. Meanwhile, shale oil production in the U.S. will drop by 385,000 barrels per day. On the demand side, the agency expects global oil demand to climb to a five-year high of 1.7 million barrels per day this year and moderate to an increase of 1.4 million barrels per day next year (read: ” Positive News Flow Sparks Off Rally in Oil ETFs “). Though reduced output from non-OPEC and higher demand could check the global supply glut, the oil market will still remain oversupplied. As a result, Goldman lowered its 2016 price target for Brent and crude (WTI) to $49.50 per barrel and $45 per barrel from $62 and $57, respectively. Further, it also warned of crude hitting as low as $20 per barrel. How to Play? Given the bearish fundamentals, the appeal for oil will remain dull in the months ahead. This might compel investors to make a short play on the commodity, especially if they believe in Goldman. For those investors, while futures contracts or short-stock approaches are possibilities, there are a host of risk inverse oil ETF options that prevent investors from losing more than their initial investment. Below, we highlight some of these ETFs and the key differences between them: The United States Short Oil ETF (NYSEARCA: DNO ) This is an unpopular and liquid ETF in the oil space with an AUM of $24.7 million and average daily volume of 32,000 shares. 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 and has gained about 28.2% in the trailing 13-week period. PowerShares DB Crude Oil Short ETN (NYSEARCA: SZO ) This is an ETN option and arguably the least risky choice in this space as it provides inverse exposure to the WTI crude without any leverage. It tracks the Deutsche Bank Liquid Commodity Index – Oil – which measures the performance of the basket of oil futures contracts. The note is unpopular as depicted by an AUM of $28.5 million and average daily volume of nearly 35,000 shares a day. Expense ratio came in at 0.75%. The ETN gained 30.2% over the last 13-week period. ProShares UltraShort Bloomberg Crude Oil ETF (NYSEARCA: SCO ) This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Bloomberg WTI Crude Oil Subindex. It has attracted $152.7 million in its asset base and charges 95 bps in fees and expenses. Volume is solid as it exchanges nearly 1.7 million shares in hand per day. The ETF returned about 56% over the last 13 weeks (read: ” Oil Tumbles to Six-Year Low: ETF Tale of Two Sides “). PowerShares DB Crude Oil Double Short ETN (NYSEARCA: DTO ) This is also an ETN option providing 2x inverse exposure to the Deutsche Bank Liquid Commodity Index-Light Crude, which tracks the short performance of a basket of oil futures contracts. It has amassed $47.7 million in its asset base and trades in a moderate daily volume of roughly 103,000 shares. The product charges 75 bps in fees per year from investors and is up 28.3% in the same time frame. VelocityShares 3x Inverse Crude Oil ETN (NYSEARCA: DWTI ) This product provides 3x or 300% exposure to the daily performance of the S&P GSCI Crude Oil Index Excess Return. The ETN is a bit pricey as it charges 1.35% in annual fees while average daily volume is good at over 1.8 million shares. It has amassed $222.6 million in its asset base and delivered whopping returns of nearly 72.2% in the same period. Bottom Line As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures. Still, for those ETF investors who believe in Goldman and are bearish on oil, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is a friend” in this corner of the investing world. Original Post Scalper1 News
Scalper1 News