ETFs To Play An Oil Price Drop [United States Oil Fund LP (ETF), ProShares UltraShort DJ-UBS Crude Oi ETF]

oil etfsOil prices witnessed a continued ascent in the first half of the year. A stretched and severe winter in the northern hemisphere, and prolonged geo-political tensions from Russia to Iraq that disrupted supplies helped the commodity to register a triple-digit mark (per barrel) in early 2014.

However, the momentum was recently snapped with Brent oil dropping to a 16-month low to $100.34 per barrel (on September 2, 2014) and West Texas Intermediate (WTI) crude oil slipping 3.2% to $92.88 per barrel on the same day. WTI prices represented the lowest level since January.

Increased production resulting in plentiful supplies, strength in the greenback, slower manufacturing activities in Europe – which is buckling under deflationary pressure – and a sluggish Chinese economy took a toll on the oil prices despite moderate threats of supply disruption from the ongoing turmoil in Iraq, Russia and Gaza.
Notably, the said nations play a strong role in regulating global oil prices as these are oil rich (read: Uprising in Iraq Puts These Oil ETFs in Focus).

What is Dragging Down Oil? 

Manufacturing activity in the Euro zone slackened to a 13-month low in August, indicating faltering economic recovery. Though the activity grew in Germany and Spain, the rate of growth has been slow.

Not only this, the cooling Chinese demand has also been weighing on the oil prices. Manufacturing activity in China – the second largest economy in the world – fell shy of expectations in August, reinforcing the trend.
Moreover, the value of the U.S. dollar peaked to the eight-month high with respect to yen as investors wager on speeding U.S. growth. As we know oil price shares an inverse relationship with the greenback, the recent slide is self explanatory.

Oil inventory remains in a good shape in the U.S. Per Bank of America, the U.S. will likely be the world’s biggest oil producer this year leaving Saudi Arabia and Russia behind thanks to its shale-oil boom.

U.S. production of crude oil including liquids separated from natural gas exceeded almost every country in the first quarter producing more than 11 million barrels a day. Another source indicated that 2015 could be the biggest crude oil output year for the U.S. after 1972 (read: High Output and Weak Demand Hitting Oil ETFs).

If these were not enough, the prediction for favorable weather outlook in the U.S. hinted at reduced energy demand. Investors should note that the U.S. enjoyed the coolest summer in five years from June through August. This sapped the cooling demand in the U.S.

Market Impact 

Per Bloomberg, gasoline futures plunged to the lowest level for a front-month contract since November. ETFs tracking oil futures United States Brent Oil Fund (BNO), United States Oil Fund (USO), PowerShares DB Oil Fund (DBO) and iPath S&P GSCI Crude Oil Index ETN (OIL) shed  2.5%, 2.7%, 2.3% and  3.1%, respectively, on September 2. Notably, ETF tracking natural gas futures –United States Natural Gas (UNG) – lost 4.3% in recent trading.

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