This is especially true as a boom in U.S. shale oil production, abundant supplies, no output cut by the Organization of the Petroleum Exporting Countries (OPEC) as well as slowing demand in the U.S., Europe and China are heavily weighing on the demand/supply picture.
Fundamentals Getting Worse
As per the latest EIA report, the U.S. crude stockpiles rose 5.4 million barrels in the week (ending January 9), much higher than the market expectation of a 417,000-barrel increase. Total inventory came to 387.8 million barrels, representing the highest level in at least 80 years. The U.S. production climbed 60,000 barrels per day to 9.19 million last week, the highest since 1983. Higher inventory and increased production are only adding to the supply glut.
Further, OPEC reduced its demand forecast by 100,000 barrels per day to 28.78 million barrels a day for 2015, representing the lowest level in 12 years. Moreover, the World Bank reduced its global growth forecast for this year and the next, intensifying worries over sluggish demand growth in the oversupplied energy markets.
Apart from these, the expected launch of a government bond-buying program by the European Central Bank (ECB) on Thursday will likely create further pressure on the price of oil.
Investment Firms Slash Oil Targets
A number of brokerage firms have downgraded their price target for oil over the last two weeks. Goldman (GS) cut the near-term (three-month) price target for Brent and WTI to $42 per barrel and $41 per barrel from $80 and $70, respectively. The bank also warned that the price could stay near $40 per barrel for quite some time until the oil companies cut supplies and new investments in oil shale industry that are adding to the glut (read: Any Hope for a Gold and Oil ETF Rebound in 2015?).
For 2015, Brent oil and WTI will trade around $50.40 per barrel and $47.15 per barrel, down from the previous projection of $83.75 and $73.75, respectively. Another investment bank JPMorgan Chase (JPM) also sees Brent oil falling below $40 per barrel in the near term and expects Brent to average at $49 barrel this year.
Citigroup (C) slashed its Brent target price to $63 per barrel to $80 and WTI Target price to $55 from $72 for 2015. Societe Generale reduced expectations for Brent crude to $55 from $70 per barrel and WTI to $51 from $65 per barrel. BNP Paribas also lowered its oil price target by more than $10 for both Brent and WTI.
Rating agency Standard & Poor slashed the oil price forecast or the fourth time in three months, spreading bearishness in the whole sector. The agency now expects oil price to fall by more than 20% to $55 per barrel for 2015 and 13% to $65 per barrel for 2016 from its earlier projection.
How to Play?
Given the bearish fundamentals, the appeal for the oil will remain dull until it finds the bottom, which seems far away at present. This has compelled investors to make a short play on the commodity. For those investors, while futures contract or short-stock approaches are possibilities, there are s host of lower risk inverse oil ETF options that prevent investors from losing more than their initial investment.
Below, we highlight some of those and the key differences between them:
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 the Deutsche Bank Liquid Commodity Index – Oil – which measures the performance of the basket of oil future contracts. The note is unpopular as depicted by AUM of $9.1 million and average daily volume of nearly 3,000 shares a day. Expense ratio came in at 0.75%. The ETN gained 86.3% over the 26-week period.
ProShares UltraShort Bloomberg Crude Oil (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 $246.7 million in its asset base and charges 95 bps in fees and expenses. Volume is solid as it exchanges nearly 1.4 million shares in hand per day. The ETF returned over 245% over the last 26 weeks.
PowerShares DB Crude Oil Double Short ETN (NYSEARCA:DTO)
This is 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 $78.2 million in its asset base and trades in a moderate daily volume of more than 116,000 shares. The product charges 75 bps in fees per year from investors and has surged over 216% in the same time frame.
VelocityShares 3x Inverse Crude 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 moderate at 74,000 shares. It has amassed $101.4 million in its asset base and delivered whopping returns of nearly 510% in the same period.
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 ETF investors who are bearish on oil for the near term, 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 your friend” in this corner of the investing world.
This article is brought to you courtesy of Sweta Killa.