Crude Oil Set For A Struggle

With the largest single day drop in gold prices dominating the headlines, many consumers have overlooked crude oil’s significant fall in prices as of late. Even without the decline earlier this week, crude has been relatively weak as of late, with few expecting this to change soon.  It seems that the pressure keeping prices at bay is only expected to rise in the coming months and years as this commodity may be slowly losing its dominance [for more oil news and analysis subscribe to our free newsletter].


Surging Production and Competition

The increase in oil production in countries outside of OPEC has thrown a wrench into the global market place. Besides Venezuela, which has been selling its oil outside of OPEC for a long time now, Russia, Canada and the U.S. have all increased production of crude; the IMF predict an increase of 1 million barrels a day in 2013. This actually exceeds the demand for oil, putting pressure on prices and driving them down.

Advances in hydraulic fracturing (fracking) as well as horizontal drilling have helped unlock huge reserves of natural gas around the world and have been especially beneficial to countries that once relied on outside energy. This trend towards natural gas has started to eat away at crude’s dominance in the energy market and is only expected to grow.

There are big differences between the many types of oilGrowth Worries

Posing a deeper threat in the short term, oil tanked earlier this week after China’s disappointing GDP data worried markets, sending crude prices to a 2013 low. Many analysts are quick to note that April and May have always been down seasons for oil in China, and that they expect to see demand increase once again in the summer [also see Commodity Growth: All Eyes On China].

Still, the threat of an economic slowdown in China will continue to threaten crude prices, as China is the second-largest consumer behind the U.S. Any news of a slowing economy or curtailing demand could deal a major blow to this commodity.

Profiting from Falling crude

Should crude prices continue to fall, there are a number of ways that investors can turn a profit.

  • 3x Inverse Crude ETN (DWTI): Composed entirely of WTI crude oil futures contracts, this ETF adds a -300% leverage to oil’s daily movements. With a year to date return of 11.8%, DWTI has so far enjoyed a a strong start to 2013.
  • United States Oil Fund (USO): Tracking the changes in the price of light, sweet crude, this is one of the most popular oil ETFs available. Investors can use options to bet on a dip in this fund during poor times for oil.
  • ISE Revere Natural Gas Index Fund (FCG): Betting on natural gas rising could be a profitable way to play if the fossil fuel continues to eat away at crude oil’s market share.

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Disclosure: No positions at time of writing.

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