On Tuesday, oil prices deteriorated and it was reported that the pricing rally for the month of August had been exaggerated. The suggested move to freeze oil production would not be beneficial in a market that is already over supplied. The price of Brent crude oil was trading at slightly below $49 per barrel, down under a 1 percent from the previous close. The West Texas intermediate on the other hand was trading slightly above $47 per barrel down by 0.37 cents according to futures data.

Analysts say that this downward trend is caused by the over rated price rally in the month of August which increased the prices of crude oil by more than 20% as per the end of last week. Over this period, Brent prices have gone down by more than 4%.

The current disputes between Iran and Saudi Arabia which are the biggest players in OPEC reduce the likelihood of a deal being reached. The other major challenge is bringing Russia on board. Russia is not a member of OPEC yet it is one of the largest producers of Crude Oil. They control a huge percentage and their failing to corporate with OPEC means they are not under any regulations.

Goldman Sachs notes that, “Oil prices have rebounded sharply since the beginning of August and it is believed that the move was not driven by incrementally better oil fundamentals, but instead by headlines around a potential output freeze as well as a sharp weakening of the dollar”. It is expected by many sources that the prices of crude oil might range from $45 to $50 per barrel by around the same time next year. They further note that “a sustainable pick-up in disrupted production would lead to lowering of oil price forecasts with West Texas Intermediate prices averaging at about $45 per barrel”.

According to BNP Paribas, rapid efforts to bring balance to the oil market is being met by a series of challenges. These challenges include the return of supply and  further imbalances as a result of OPEC’s collective output increasing. These oil dynamics have negatively affected oil stocks, which have been on a downward trend. This is partly the effect of the strengthening dollar which went up as a result of speculations of an increase in the interest rates. The result here is a dent in the prices of goods whose prices are stated in dollars. According to Neil Dwane, of Allianz Global Investors, “The federal reserve’s plan and its impact on the dollar remain the pulse of much of the market’s focus”.

If market participants are expecting a further decline in the price of oil, there are many exchange traded funds that are either long or short oil. Some of these include the following per the ETFHeatMap database:

  • SZO – PowerShares DB Crude Oil Short ETN
  • DTO – PowerShares DB Crude Oil Double Short ETN
  • DDP – PowerShares DB Commodity Short ETN


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