Profiting From Oil’s Continuing Decline

Oil prices have been more than halved over the past three years. That’s bad for oil producers but has been a boon to consumers. Short-sellers in the futures pits (well, the virtual futures pits, anyway) have also profited handsomely from the decline in crude prices. But now, those same traders are puzzling out oil’s next move. Are prices headed further south, or are they due to rebound?

The folks at Goldman Sachs have lined up on the bullish side. In a recent research note, Goldman’s European energy team argues that prices are below shale producers’ marginal cost of production—an unsustainable condition that’s likely to precipitate a pullback in output. That should, says Goldman, lever prices upward.

Analysts at Seaport Global Securities think otherwise. They say the glut of oil isn’t going to be mopped up anytime soon. In fact, Global believes crude’s headed to $20 a barrel by early next year, largely due to a ramp-up in oil-rig counts.

Both views are entirely plausible. And they’re not mutually exclusive. Oil prices could certainly sell off hard in the near term before rebounding. That, in fact, seems the more probable course technically.

There are about a half-dozen ways opportunistic investors can play the short side of the oil market without stepping directly into futures. These are exchange traded funds (ETFs) and notes that can be bought and sold within a securities account. Each has a unique mix of underlying index methodologies, leverage factors and risk exposures.  

The first inverse products to hit the market were low on leverage; as new notes and funds came to market, gearing’s been ramped up. The most recent entries offer -300 percent (-3x) exposure to the oil market, but are so new it’s hard to evaluate their real-time performance. Four products, though, have been around long enough to produce three-year track records.

Yes, I know we’re not supposed to hold inverse and leveraged products for long periods, but bear with me for a moment.

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Disclosure: Brad Zigler pens's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) option ...

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Chee Hin Teh 3 years ago Member's comment

Many thanks