Investment Strategies for Those Bearish on Unraveling Oil Prices

Investment Strategies for Those Bearish on Unraveling Oil PricesHooray, gasoline prices at the pumps have declined to their lowest levels this year! Better yet, they’re looking to head even lower, as oil prices begin to unravel below $100.00 per barrel.

The level of oil reserves jumped by 5.2 million barrels for the week ended October 18, according to the Energy Information Administration (EIA). There are some 379.8 million barrels of oil in our reserves, and that doesn’t include those in the Strategic Petroleum Reserve.

With the rise in reserves and lower demand due to the recent government impasse, the country is importing only 7.7 million barrels per day versus the four-week average of 8.0 million, according to the EIA. (Source: “Summary of Weekly Petroleum Data for the Week Ending October 18,” Energy Information Administration web site, last accessed October 25, 2013.)

Today, the United States is less dependent on foreign oil than at any time in its recent history. The country is producing more domestic oil specifically from the shale oil in North Dakota and Montana. (Read “Why You Shouldn’t Be Worried About Surging Oil Prices.”).

The EIA says North America is now the biggest producer of usable shale oil in the world, and it’s only going to get bigger as new technologies surface that can extract even harder to get oil. In 2012, shale gas represented 39% of total natural gas production in 2012 in the United States, according to the EIA. Canada was second at 15%.

In my view, the rapid development of shale oil will continue to lessen the country’s dependence on OPEC oil, and this is good for both the economy and geopolitical side.

This is why the oil prices for West Texas Intermediate (WTI) oil, which is produced domestically, has continued to decline and is currently much lower than Brent crude oil at around $109.00 per barrel.

Take a look at the chart below comparing the oil prices of WTI (dark green line) versus Brent (red candlesticks).

In 2008, the oil prices gap between the two crudes was small. But since then, the spread between the two has widened, and this will likely continue as the domestic oil production rises and lowers WTI oil prices.

Brent Crude Oil Chart

Chart courtesy of

Also add in the tar sands oil flowing in from Canada, and we could see domestic oil prices decline even more. And then there’s also the energy created by wind and water, along with the major move for green energy usage, which will inevitably lessen the demand for oil, driving oil prices even lower.

In fact, if the U.S. continues to produce more oil and if the country allows the transport of oil from Canada along the Keystone line, we will probably see a declining need for OPEC oil.

In the end, there could be a time when gasoline oil prices decline much lower as we move forward.

With this in mind, you could look to play the bearish side of oil prices via the use of bearish exchange-traded funds (ETFs) that profit as oil prices decline, like PowerShares DB Crude Oil Short ETN (NYSEArca/SZO). For more aggressive traders, there’s PowerShares DB Crude Oil Double Short ETN (NYSEArca/DTO); however, the risk is high with these ETFs, so I’d advise that only traders consider this option.