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How to Make a Play on Crude Oil's Dip


It seems that crude oil is hell-bent on taking the place of natural gas.

Earlier in the year, it seemed like natural gas was the commodity with little to no hope, as the fossil fuel posted some impressive losing streaks. But it seems that crude oil is hell-bent on taking the place of natural gas, as WTI futures have slid for six consecutive days, making it the longest losing streak for this commodity in nearly two years. But crude's rather volatile behavior in the past six months can be attributed to a number of macroeconomic factors pushing and pulling the asset in either direction.

Let's start overseas, where tensions in the Middle East and some of the world's biggest oil producers caused concern for the future supply of this commodity. Oil prices shot up over a several week span, especially after threats to close the the Strait of Hormuz, a small body of water through which nearly 40% of the world's oil passes, surfaced from Iran. But oil prices would not remain at their elevated levels for too long, as pressure from European woes led to a sell-off in the commodity as many feared for the demand side of crude's use. Demand, however, is not the only issue at play, as it seems that US supplies are causing futures to crater.

"We're facing price pressure on the supply side and the demand side," said David McAlvany, chief executive officer of McAlvany Financial Group in Durango, Colorado. "We continue to see big increases in crude supply. There's palpable fear in Europe, and it's not limited to Greece," writes Mark Shenk. Yesterday's inventory levels showed a jump to nearly 380 million barrels, the highest that stockpile has been in almost 22 years. Crude futures have shaved off nearly 10% in the last six days as some paint a bleak future for this commodity.

As this trend has continued to develop, many investors and traders alike are looking for lucrative ways to profit from a dip in oil. Below, I offer several ways for investors to gain from crude's losses.
  • 3x Inverse Crude ETN (DWTI): For anyone with strong convictions that this drop is far from over, this ETN is for you. Applying a 3X inverse to crude futures has allowed 3x Inverse Crude ETN to gain over 22% since May began. This fund is incredibly risky and could make or break you; be sure to use limit orders to ensure a good trade.
  • UltraShort DJ-UBS Crude Oil (SCO): This ETF applies a -200% leverage to the The Dow Jones-UBS Crude Oil Sub-Index. It won't move as much as 3x Inverse Crude ETN, but may be better for those who aren't quite daring enough to hop into a 3X position.
  • 3x Long Crude ETN (UWTI): This is a great play for those looking to bet against the trend. The sister fund to 3x Inverse Crude ETN, this ETN simply offers a positive 3X leverage on crude futures. For those who think that oil is oversold, entering this fund at a low point could be a lucrative play, though this fund will continue to slide big time if crude does the same.
A Grain of Investing Salt

It should be noted that the outlook on crude can change in an instant. Should a war break out in Iran and other neighboring nations, some analysts peg oil as hitting $150/barrel and beyond. It is also important to remember that we are entering the summer months, where demand for crude and gasoline typically rises, allowing prices to do the same. Crude oil is a very volatile commodity, and this downtrend could be turned on its head in an instant. Always ensure that you carefully monitor your positions and utilize stop-loss orders whenever possible.

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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
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