Oil-Soaked Inverse ETNs Spike Higher

While the energy sector has generally fallen victim to a global economy beset by pandemic-spurred lockdowns, certain petroleum-related, inverse leveraged exchange-traded notes (ETNs) have seen a dramatic rise in value.

The recent plunge in the cost of crude has fallen at the heels of slowing global growth, weakening demand dynamics, and rising fears about defaults across the industry.

The International Energy Agency (IEA) Wednesday said, for example, that it expects global oil demand to fall by a record 9.3 mb/d year-on-year in 2020, as the impact of containment measures in 187 countries and territories has brought “mobility almost to a halt.”

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Moreover, the IEA estimates demand in April to plummet by 29 mb/d compared to the prior year – to a level not seen since 1995.

The agency added that while OPEC+ has come to a historic agreement to cut production by 9.7 mb/d, the effective reduction comes to 10.7 mb/d given April’s high level.

Based on the OPEC+ deal, global oil supply is set to plunge by a record 12 mb/d in May.

Oil futures responded to the grim news by falling below US$20 before regaining a sliver of those losses later in the intraday trading session. The active WTI contract was last up by nearly 1.30% to US$20.37, according to the IBKR Trader Workstation.

Inverse Investing

Meanwhile, as prices of oil futures tick downwards, investors in the energy sector may be eyeing recent gains in certain inverse leveraged ETNs on the IBKR Trader Workstation’s Mosaic Market Scanner.

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Sources: IBKR Trader Workstation, Bloomberg

Year-to-date in 2020, shares of these major U.S. oil companies have plunged by double digits – some shedding around two-thirds of their equity value: Chevron has shaved-off31.55%, Occidental Petroleum has plunged 67%, Marathon Petroleum has fallen 60.2%, and Exxon Mobil has dropped by 42%, while the S&P 500 has sunk around 13.9% over the same period.

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Prolonged Weakness

The MicroSectors U.S. Big Oil Index Inverse Leveraged ETNs could continue to churn out gains, should the International Monetary Fund’s (IMF) latest growth outlook for the global economy become realized, and energy sector defaults worsen.

The IMF noted in its World Economic Outlook (WEO) for April 2020 that it anticipates a sharp, -3% contraction in the global economy in 2020 as a result of the coronavirus pandemic, “much worse” than during the 2008–09 financial crisis.   

The IEA’s news Wednesday added further fuel to a bleak assessment about commodities from the IMF, which said that oil prices will likely remain below US$45 a barrel through 2023, around 25% lower than the 2019 average price, reflecting “persistently weak demand.”

The IMF added that the spread of the novel coronavirus epidemic, as well as an earlier breakdown of the OPEC+ agreement among oil suppliers, have generally “weighed heavily on commodity prices.”

The recent slide in oil prices has also fallen in the wake of twin demand and supply shocks, which had already spurred oil futures prices to fall by 40% in March.

Deep Impact

The dismal performance of the energy sector has also been blamed for rising default rates in the U.S. high-yield corporate bond market.

According to Fitch Ratings, oil-related industry defaults in 2020 could reach 17% by year-end, closing in on the record 19.7% mark set in January 2017.

Fitch noted that the trailing twelve-month (TTM) energy default rate stands at 9.9% following Whiting Petroleum’s (NYSE: WLL) bankruptcy, while several other companies could suffer “imminent defaults,” including:

Ultra Resources (OTCMKTS: ULTXF); Vine Oil and Gas; Chesapeake Energy (NYSE: CHK); California Resources (NYSE: CRC); Denbury Resources (NYSE: DNR); Unit Corp (NYSE: UNT); and Chaparral Energy (NYSE: CHAP)

Fitch’s added that the tally on its list of most concerning bonds has climbed to US$44.1bn from US$35.7bn in the prior month, with 60% of the volume comprising energy companies.

Investors watching oil futures prices will likely be keeping a close eye on these firms, as well as the MicroSectors U.S. Big Oil Index Inverse Leveraged ETNs, all of which may be constructed and customized through the IBKR Trader Workstation’s Mosaic Market Scanner.