Author Archives: Scalper1

Oil has been the most perplexing commodity of 2015, with big busts and occasional rises seen in a very short period of time. In particular, oil tanked to a seven-year low on Monday after the Organization of the Petroleum Exporting Countries (OPEC) failed to address the growing supply glut. Crude plunged 6% to $37.50, and Brent oil tumbled more than 5% to $40.73. What Happened? At its meeting on Friday, OPEC members decided to continue pumping near-record levels of oil to maintain market share against non-OPEC members like Russia and U.S. in an already oversupplied market. Iran is also looking to boost its production once the Tehran sanctions are lifted. As per the Iran oil minister, Bijan Namdar Zanganeh, production will likely increase by 500,000 barrels a day within a week after the relaxation in sanctions and by 1 million barrels a day within a month. Oil production in the U.S. has also been on the rise, and is hovering around its record level. Further, the latest bearish inventory storage report from the EIA has deepened the global supply glut. The data showed that U.S. crude stockpiles unexpectedly rose by 1.2 million barrels in the week (ending November 27). This marks the tenth consecutive week of increase in crude supplies. Total inventory was 489.4 million barrels, which is near the highest level in at least 80 years. On the other hand, demand for oil across the globe looks tepid given slower growth in most developed and developing economies. In particular, persistent weakness in the world’s biggest consumer of energy – China – will continue to weigh on demand outlook. Notably, manufacturing activity in China shrunk for the fourth straight month in November to a 3-year low. The International Monetary Fund (IMF) recently cut its global growth forecast for this year and the next by 0.2% each. This is the fourth cut in 12 months, with big reductions in oil-dependent economies, such as Canada, Brazil, Venezuela, Russia and Saudi Arabia. That being said, the International Energy Agency (IEA) expects the global oil supply glut to persist through 2016, as worldwide demand will soften next year to 1.2 million barrels a day after climbing to the five-year high of 1.8 million barrels this year. In addition, a strengthening dollar backed by the prospect of the first interest rate hike in almost a decade as soon as two weeks is weighing heavily on oil price. This suggests that the worst for oil is not over yet, with some forecasting a further drop in the days ahead. Notably, the analyst Goldman and OPEC predict that crude price will slide to $20 per barrel next year. How to Play? Given the bearish fundamentals, the appeal for oil will remain dull in the coming months. This has compelled investors to think about shorting oil as a way to take advantage of the strong dollar and commodity weakness. While futures contract or short-stock approaches are possibilities, there are 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 WTI crude without any leverage. It tracks 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 its AUM of $17.2 million and average daily volume of nearly 20,000 shares a day. The expense ratio came in at 0.75%. The ETN gained 17.5% over the last 4-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 $126.8 million in its asset base, and charges 95 bps in fees and expenses. Volume is solid, as it exchanges nearly 1.3 million shares in hand per day. The ETF returned 38.8% over the last 4 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 $67.1 million in its asset base, and trades in a moderate daily volume of around 59,000 shares. The product charges 75 bps in fees per year from investors, and surged about 34% 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 it trades in heavy average daily volume of 1.6 million shares. It has amassed $174 million in its asset base, and has delivered whopping returns of nearly 61% in the trailing four weeks. 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 (see all Inverse Commodity ETFs here ). 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 the friend” in this corner of the investing world. Original Post