Blogs & Comment

Betting on oil’s fall

Im not convinced the price of crude oil will stay above $135 (U.S.) a barrel forever. Sure, there has been a secular rise in demand against scarce supplies but I think the price has also been inflated by some temporal factors, particularly the upswing in the global business cycle (now ebbing), rising investment demand (could be dampened by investigations into market manipulation/loopholes), and inflation hedging (central banks now shifting their focus to controlling inflation). A June 11 report from TD Economicsprovides further analysis supporting the bearish view.
As such, an interesting investment to consider is the Horizons BetaPro NYMEX Oil Bear Plus exchange-traded fund(ETF). Listed on the Toronto Stock Exchange in Canada under the symbol HOD, it double shorts the price of oil, i.e. tracks two times (200%) the inverse (opposite) of the daily performance of the NYMEX light sweet crude-oil futures contract for the next delivery month. In the U.S., there is the UltraShort Oil & Gas ProSharesETF, which returns 200% of the inverse of the performance of the Dow Jones U.S. Oil and Gas Index.
The double-short oil ETFs let an investor short the oil sector without the hassle of an actual short trade on futures contracts or oil stocks (or buying put options). One can sit on the ETF position in a non-registered account or even aregistered retirement account for as long as it takes, without the bother of margin calls or time decay.
That will come in handy. If oil spikes up more from here, one can just wait it out although the paper loses could easily tally 20% to 30% given the volatility and leverage at work. Longer term, however, as the price of oil normalizes, the same volatility and leverage should erase the losses in short order and go on to provide some nice gains. Actually, as part of ones strategy, its tempting to consider averaging down on the double-short oil ETFs if oil prices shoot up again from current levels. Disclosure: I own HOD (as of today).