Energy markets are being dragged down on speculation that the global oil glut could get worse. Nevertheless, traders can still hedge against further weakness with inverse exchange traded fund strategies.
According to Goldman Sachs Group’s latest assessment, a failure to quickly cut production now could drive oil prices to $20 per barrel, a necessary level to adequately clear the oversupply, Bloomberg reports.
“The oil market is even more oversupplied than we had expected and we now forecast this surplus to persist in 2016,” Goldman analysts including Damien Courvalin wrote in a report. “We continue to view U.S. shale as the likely near-term source of supply adjustment.”
Goldman reduced its 2016 estimate for WTI to $45 per barrel from a previous projection of $57 due to production growth from the Organization of Petroleum Exporting Countries, steady supply outside of the group and slowing global demand. The investment bank also calculated that Brent crude could average $49.5 per barrel, compared to previous forecasts of $62.
West Texas Intermediate crude oil futures were hovering around $45.2 per barrel and Brent crude oil was trading around $48.6 per barrel Friday.
“We now believe the market requires non-OPEC production to shift from our prior expectation of modest growth to large declines in 2016,” Goldman added. “The uncertainty on how and where that adjustment will take place has increased.”
The International Energy Agency also came out on Friday to predict production outside of OPEC will decline by 500,000 barrels per day to 57.7 million in 2016, with shale oil producers cutting down by 385,000 barrels per day as crude prices dip below the $50 “slams brakes” level.
However, in the meantime, oil traders may continue to see oil prices decline before things get better. Consequently, investors can utilize a number of inverse or bearish ETF options to hedge against further weakness.
For instance, the United States Short Oil (DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, and the DB Crude Oil Short ETN (SZO) also tracks the simple inverse of oil. [Leveraged ETFs Are Popular Plays Among Swing Traders]
For the more aggressive trader, there are number of leveraged options, including the ProShares UltraShort Bloomberg Crude Oil (SCO) , which tries to reflect the two times inverse or -200% daily performance of WTI crude oil, and DB Crude Oil Double Short ETN (DTO) , which also follows a -200% performance of oil, jumped 17.4%. Lastly, the VelocityShares 3x Inverse Crude (DWTI) takes the three times inverse or -300% performance of crude oil.