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Short Oil ETFs in Focus as Crude Prices Keep Falling


The oil investing phobia eased somewhat as crude saw the strongest two-week gain in 17 years early February, on sharp spending cuts by big U.S. oil drillers. But this respite was short-lived as oil prices started to dip again. Many hoped the commodity would be able to hold above $50. But to their disappointment, WTI crude fell below $44 a barrel on March 16.

A host of reasons including worries over shrinking storage facility for surplus oil in the U.S. and China, abundant supplies in non-OPEC nations and OPEC caution that production in the U.S. might not slow down before the end of the year hit the brakes on the apparent oil price recovery (read: Oil Price Above $50: 3 ETFs to Watch).

Per Bloomberg, the Fed stated that U.S. crude production has risen although the commodity took a six-year lowest plunge. The Fed's oil extraction index increased 0.4% sequentially and 14.4% year over year to 179.8 in February. Meanwhile, OPEC cut its global demand forecast for crude by 100,000 barrels to 29.19 million barrels per day.

The trend was echoed by the International Energy Agency (IEA) which reported on March 13 that global crude supply is outstripping demand. Supplies for U.S. crude touched a record-level of 448.9 million barrels, resulting in a shortage of storage facility. Aside from these sluggish data points, the recent strength in the greenback on the likely Fed tightening weighed on oil prices.

Following the release of such downbeat data, crude for delivery in April has reached a low that was not witnessed after March 2009. The situation is much the same for the oil ETFs. Path S&P GSCI Crude Oil Total Return (NYSE ARCA:OIL), United States Oil Fund LP (ETF) (NYSEARCA:USO) and United States Brent Oil Fund, LP (NYSE ARCA:BNO) saw massive falls in the last five trading sessions (as of March 16, 2015) in the range of 12% to 19% (see all energy ETFs here).

How to Play?

Given this situation, investors may want to consider shorting oil as a way to take advantage of the stronger dollar and the fresh weakness in the commodity. While investing in futures or short-stock technique is certainly an option, investors can also tap into this trend by purchasing a host of short oil ETFs:

ProShares Ultra DJ-UBS Crude Oil (NYSE ARCA:UCO)

SCO is the most popular option in the short oil ETF space having an asset base of $284 million. The fund tracks the Dow Jones-UBS Crude Oil Sub-Index to provide twice the inverse performance of WTI crude oil on a daily basis. Volumes are also great as roughly 2 million shares change hands daily. However, expenses are a bit steep at roughly 95 basis points annually. The fund was up 16.9% in the last five trading sessions (as of March 16, 2015).

PowerShares DB Crude Oil Double Short ETN (NYSE ARCA:DTO)

Investors seeking to use the ETN approach to inverse crude investing can consider DTO for exposure. The fund follows a benchmark of crude oil futures contracts to provide -2x exposure. While the fund manages a small AUM of $57.7 million, volumes are pretty good at about 175,000 shares a day. Also, the fund is cheaper with 75 basis points as annual fees. The fund was up about 15.5% in the last five trading sessions (as of March 16, 2015) (see all Inverse Commodity ETFs here

 

PowerShares DB Crude Oil Short ETN (NYSE ARCA:SZO)

SZO is the least risky bet in the space providing -1x short exposure to WTI crude. The ETN tracks the Deutsche Bank Liquid Commodity Index-Oil for this purpose, while it also adds in the yield from short-term T-bills.

However, the product is quite unpopular with an asset base of just $5.6 million and trades in low volumes of under 5,000 shares, which might result in additional costs in the form of wide bid-ask spreads. Expenses come in at 75 basis points annually. The fund was up about 8.9% in the last five trading sessions (as of March 16, 2015).

VelocityShares 3x Inverse Crude ETN (NYSE ARCA:DWTI)

DWTI is one of the riskier ways to play the short oil market, utilizing -3x exposure with daily rebalancing. The fund tracks the S&P GSCI Crude Oil Index to provide exposure to crude oil. However, the product is quite unpopular with a low asset base of trading volume. Moreover, it is quite pricey charging 1.35% as annual fees. The fund was up about 26.2% in the last five trading sessions (as of March 16, 2015).

Bottom Line

As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Still, for ETF investors who are bearish on oil for the near term, either of the above products could make an interesting choice especially after the gloom that was spread across the field by OPEC and IEA.

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