Three ETF Plays For $30 Oil

by on December 14, 2009 | ETFs Mentioned:

Crude oil has crept gradually higher since the beginning of the year, with spot prices rising from about $35 per barrel in January to nearly $80 in recent weeks. With a sliding dollar and expectations for a strong, sustainable global economic recovery, it seemed like only a matter of time before crude jumped above $100 and the public outrage was dialed back up. But in recent weeks, crude oil prices have slumped, recently enduring a seven day losing streak that saw futures prices lose more than 5% and hit a new two-month low.

Three ETF Plays For $30 OilThe recent weakness has caused some investors to rethink the assumption that oil is firmly entrenched on an upward path. “Supply outweighs demand by about 18-fold at a time when crude oil is finally starting to move based on supply and demand,” writes Sheena Martin. “Hardly a bullish sign for the commodity.”

Others think investors may be beginning to reel in expectations for the recovery, gradually recognizing that the road back to stability and consistent growth is dotted with potholes. “Market participants seem to be coming slowly to the realization that a true recovery will take years,” said Jason Schenker of Prestige Economics.

The Energy Information Agency has also lowered its expectations for crude pricing, although their estimates remain well above the lows hit earlier this year. The agency indicated that the global crisis may have permanently removed some demand from the market, and that energy-saving initiatives could weigh on consumption levels in coming years. According to its most recent forecast, the EIA expects world oil consumption to rise by 1.1 million barrels next year to 85.22 million barrels per day (down from its previous prediction of 85.4 million). The EIA thinks that oil will average $75 this winter and $82 on average next year.

ETF Plays On Falling Oil

Many investors believe that $50 is the new floor for oil prices, with demand from emerging global powers and coordinated activity from suppliers preventing prices from sinking too substantially. Moreover, a number of experts believe that there remains considerable room on the upside, predicting that crude will burst through the $100 level sometime in 2010 (the odds of hitting this mark are pretty good) and the $200 level in the next three years.

But for those contrarians who believe a coming double dip recession could curb demand and that a resilient dollar will weigh on commodity prices, there are several ways to play falling oil prices through ETFs (for more actionable ETF investment ideas, sign up for our free ETF newsletter):

  • ProShares Short Oil & Gas (DDG): This inverse ETF seeks to deliver daily returns equal to -100% of the daily performance of the Dow Jones U.S. Oil & Gas Index, a benchmark that includes energy giants like Exxon, ConocoPhillips, Valero, and Schlumberger. If oil prices retreat to beginning-of-year levels, these companies could take a hit.


  • United States Short Oil Fund (DNO): Launched in September, this fund is designed to inversely reflect the movements in the price of light, sweet crude oil delivered to Cushing, Oklahoma as measured by the changes in the price of futures traded on the NYMEX. Because DNO focuses on near month futures to accomplish its investment goal, it may have a material “roll yield” (either positive or negative) when it rolls holdings over to the next month (see What’s Wrong With UNG? for a look at how contango in futures markets can impact ETF returns).


  • PowerShares DB Crude Oil Double Short ETN (DTO): For investors looking to double down on a slip in oil prices, DTO offers leveraged exposure inverse to a total return version of the Deutsche Bank Liquid Commodity Index – Oil, which is composed of certain crude oil futures contracts. DTO charges an expense ratio of 0.75%.


Disclosure: No positions at time of writing.