All hopes of an output freeze deal went down the drain on April 17 after Iran excused itself from the meeting of 18 oil-producing nations in Doha. An expected positive outcome of the discussion between OPEC (Organization of the Petroleum Exporting Countries) and non-OPEC oil
producers had lately lifted oil prices. The rest of the countries met in Doha to cap oil production at the January levels till October 2016, but all efforts went in vain as the OPEC top-brass Saudi disagreed to the deal citing Iran’s lack of participation.
In fact, Iran has been boosting production since the international sanctions on it were lifted in January. This is because Iran was producing below its capacity and pre-sanctions levels since 2011 while the other countries raised their output limit to record levels in the mean time. So Iran is in no mood to curtail its production levels (read: Forget Production Cut: Short Oil & Energy ETFs).
So while output cut has taken a backseat, investors should keep a tab on the demand profile. As a recent report issued by the International Energy Agency (IEA), global oil demand will increase 1.2 mb/d (1.2%) in 2016, which is still below the five-year high seen in 2015 (+1.8 mb/d). Sluggish global growth and ‘mild 1Q16 OECD winter temperatures’ are expected to hurt oil demand.
In such a situation, the only ray of hope is declining U.S. output. U.S. crude oil production is likely to drop from an average of 9.4 million b/d in 2015 to 8.6 million b/d in 2016 and to 8.0 million b/d in 2017, going by what the U.S. Energy Information Administration (EIA) noted earlier this month.
The likely decrease in cash flows in 2016 and 2017 led energy companies to slash big capital expenditure, postponing key new projects till substantial pricing gains are visible, as per EIA.
However, the broader market has largely priced in the expected positive consequence of the Doha meeting, sending oil on a rally from under $30 a barrel level in January to above $40 level in recent trading (read: 5 ETFs to Buy if Oil Stays at $40).
Thus a correction is highly expected in the coming days. Had the move materialized, the oil patch – which has long been suffering from higher supplies and lower demand on weak global growth – would have seen prices shoring up and losses paring down.
Market Impact
Following the failure of the meeting, oil traded lower. Below we highlight a few oil & energy ETFs that can suffer in the coming trading sessions.
United States Brent Oil Fund (BNO): This fund provides direct exposure to the spot price of Brent crude oil on a daily basis.
United States Oil Fund (USO): This popular fund seeks to match the performance of the spot price of West Texas Intermediate or U.S. crude.
Among the energy ETFs pack, products like iShares U.S. Oil & Gas Exploration & Production ETF (IEO), SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and SPDR S&P International Energy Sector ETF (IPW) can be hit hard (read: see all energy ETFs here).
How to Profit
Given the situation, investors might want to consider shorting oil or the entire energy space. So, for those seeking to make an inverse bet on oil as a commodity or on the energy equities, below are six ETFs, any of which will prove gainful amid declining oil prices. However, investors should keep in mind that a short play in the futures market requires a strong appetite for risks.
ProShares UltraShort DJ-UBS Crude Oil ETF (SCO)
SCO tracks the Bloomberg WTI Crude Oil Subindex to provide twice the inverse performance, on a daily basis of WTI crude oil.
PowerShares DB Crude Oil Double Short ETN (DTO)
Investors seeking to use the ETN approach to inverse crude investing can consider DTO for exposure. The note follows a benchmark of crude oil futures contracts to provide -2x exposure.
VelocityShares 3x Inverse Crude ETN (DWTI)
DWTI seeks to offer three times opposite of the S&P GSCI Crude Oil Index ER (see all inverse commodity ETFs here).
ProShares Short Oil & Gas ETF (DDG)
This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. The ETF makes a profit when the energy stocks decline and is suitable for hedging purposes against the fall of these stocks.
ProShares UltraShort Oil & Gas ETF (DUG)
This fund seeks two times (2x) leveraged inverse exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index.
Direxion Daily Energy Bear 3x Shares ETF (ERY)
This product provides three times (3x) inverse exposure to the Energy Select Sector Index.
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