Inverse Oil ETFs In Focus As Iraq Threatens OPEC Deal

After Iran, now it is Iraq which might create confusion in the highly anticipated output cut deal by OPEC in Vienna in late November. Recently, Iraq indicated that it would not lower the attained oil output level of 4.7 million barrels per day, especially since the U.S. is ramping up production (read: 3 Country ETFs Soaring on Hopes of Oil Output Curb ).

Previously, Iran had posed hurdles in a definitive output curb/freeze deal. 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 meantime. So, Iran was in no mood to curtail its production levels.

Despite these apparent disagreements, members are looking forward to the upcoming formal OPEC meeting in Vienna. OPEC plans to curtail output to a range of How to Trade the Oil Rush with ETFs ).

At September end, Iran’s rate of production was over 3.6 million barrels per day (bpd), not far from its pre-sanction levels of over Top ETF Stories of September ).

Against such a backdrop, Iraq made the negative comment and spread uncertainty in the oil patch. In the absence of Irag’s involvement – which is OPEC’s second-largest producer after Saudi Arabia – the reduced target level would be tough to attain by the cartel.

Other Dampening Factors

Apart from Iraq, a rise in the number of rigs operating in U.S. oil fields stoked supply glut concerns in recent times. U.S. oil rigs increased by 11 to 443 last week, marking the first double-digit rise since August.

Plus, with the greenback hovering at a nine-month high, overall commodity investing might be hit hard as these are priced in the U.S. dollar. Global growth issues continue to pose threats to the demand scenario.

Though several analysts hope to see a rebalancing in the oil patch and some favorable demand-supply dynamics after the prolonged pressure in oil prices, the emergence of the Iraq issue may unsettle investors, even if for a while (read: Oil ETFs: Short-Term Threat, Long-Term Opportunity? ).

How to Profit

Given the situation, investors might want to consider shorting oil or the entire energy space if Iraq’s stepping out nags the oil patch for long and oil prices go downhill. So, for those seeking to make an inverse bet on oil as a commodity or on energy equities, below are a few inverse ETFs that may 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 (AX:SCO)

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SCO tracks the Bloomberg WTI Crude Oil Subindex to provide twice the inverse performance, on a daily basis of WTI crude oil.

VelocityShares 3x Inverse Crude ETN DDG

This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index.

ProShares UltraShort Oil & Gas ETF (V: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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Written By: Zacks Investment Research