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Time for Inverse Energy ETFs?

Oil prices have seen their largest decline in a month, with West Texas Intermediate (WTI) trading near $69 a barrel after a 4.4% decrease from the previous Friday. This drop in value comes amidst signs of faltering demand and an adequately stocked supply ahead of the forthcoming OPEC+ meeting.

Additionally, the manufacturing sector in China, the world’s leading crude oil importer, has demonstrated a weakening trend in May. With the U.S. dollar gaining strength, commodities priced in this currency become costlier for foreign investors. Notably, the U.S. dollar hit a more than two-month high.

Front-Month WTI Spread Into Contango

The prompt spread for WTI and Brent, the price difference between the two nearest contracts, remains in contango, indicating that nearer futures are trading at a discount to longer-dated ones. Furthermore, North Sea dated-to-frontline swaps, another barometer of physical market health, have reached their lowest in over two months.

OPEC+ Meeting and Market Expectations

The OPEC+ coalition is set to convene during the upcoming weekend to discuss its output policy. Analysts largely predict that the group will maintain its current production levels. While fundamentals do not necessarily warrant production cuts, a weakening macroeconomic environment might, some analysts also proposed the possibility of a marginal production cut.

Ample Supplies in the Global Market

Although Russia made commitments to decrease production, there is little evidence of any significant reduction in its crude oil exports to global markets. In the meantime, the country plans to increase its daily diesel exports from important western ports by almost 30% in June, as certain refineries resume full operations after seasonal maintenance, per a Bloomberg article, quoted on Yahoo.

A Year of Struggles for Oil

Oil has seen a drop of approximately 14% this year, affected by global growth slowdown fears. Furthermore, recent concerns surrounding the US debt ceiling have fostered bearish sentiment, although there are hints at a potential resolution.

Short Oil Market With Inverse Energy ETFs

Given these factors, investors may want to consider diversifying their portfolios with inverse energy ETFs. As oil prices drop, these financial instruments can offer a hedge against declines, turning market volatility into potential profit.

ETFs in Focus

MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN OILD – Up 18.1% Past Month

Direxion Daily Energy Bear 2X Shares (ERY) – Up 15.1% Past Month

ProShares UltraShort Energy DUG – Up 14.6% Past Month

ProShares UltraShort Bloomberg Natural Gas KOLD – Up 24.3% Past Montha

Word of Caution

While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period compared to a shorter period (such as weeks or months) due to their compounding effect.

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Direxion Daily Energy Bear 2X Shares (ERY): ETF Research Reports

ProShares UltraShort Energy (DUG): ETF Research Reports

MicroSectors Oil & Gas E&P -3x Inverse Leveraged ETNs (OILD): ETF Research Reports

ProShares UltraShort Bloomberg Natural Gas (KOLD): ETF Research Reports

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Zacks Investment Research