How to Profit from Falling Oil and Gas Prices with ETFs

With the continuing Middle East unrest, oil and gas prices are still high. But this situation changes daily and with oil and gas prices still high, any change can cause a drop in oil prices. Be ready to trade this drop with inverse oil and gas ETFs.

Gas prices are rising again and oil companies are reporting huge profits. Do you think oil prices have hit a peak and are about to drop. Here are some ways you can trade and profit if oil and gas prices start falling.

The public is mad about the rising cost of gas and some members of Congress are suggesting the government cut the multi-billion dollar subsidies and tax breaks for oil companies. Of course this could just be talk.

The Rise of Oil and Gas Prices

Most blame the rise in oil and gas on Wall Street speculators and Middle East tensions. That doesn’t stop the public from wanting something done. With the ongoing economic slump and the continuing high unemployment numbers, inflation is now starting to show. Higher gas prices could be a stop to any economic recovery as consumers already worried about job security will have to cut back even more on their purchases.

Another person who is conscious of his job security because of rising gas prices is President Obama, who faces re-election next year. Saudi Arabia is reportedly worried about the rise in oil prices and the effect it could have on the global economy. I would also guess that the OPEC countries also realize that if oil continues this upward trend, countries like China, India and other countries will just use more coal and start conserving again lowering crude consumption.

If the unrest in the Middle East stops and governments become more stable, that could cause oil and gas prices to drop. Even if the unrest continues in some of the oil-producing countries, Saudi Arabia might increase oil output and or the United States does something to lower gas prices at least temporarily. Any of these scenarios could be a good time to trade in falling oil and gas prices.

How to Profit from Falling Oil and Gas Prices

If you think oil prices have reached a peak and are about to drop, here are some ways to trade falling oil and gas prices. You can buy put options on individual oil companies, but they can be hard to time since you not only have to know how far they might drop in price but also be right with your timing.

You can short oil company stocks or the price of oil yourself, but shorting stocks can be risky, you can lose a lot of money fast if you were wrong and you need to be able to short from your brokerage account, not everyone can.

You can also buy ETNs (exchange traded notes) and ETFs (exchange traded funds) that short the price of oil and oil and gas stocks for you. Here is a comprehensive list of ETFs that you can trade and hopefully profit in when the price of oil and gas drops. The double or ultra-short types of ETFs can be volatile, make sure you understand them before trading them.

These double or leveraged ETFs can at times have compounding errors and should be for short term trading and watched daily.

ETFs to Short the Price of Oil

These ETFs will track and short the price of oil itself.

• DNO – United States Short Oil owns crude oil futures that will track the inverse percentage change of the spot price of light sweet crude oil delivered to Cushing, Oklahoma. This ETF shorts the near-term oil futures contract.
• SZO – PowerShares DB Crude Oil Short ETN: Is intended for traders to take a short view of oil and tracks the Deutsch Bank Liquid Commodity Index. This ETF has low volume.
• SCO – ProShares UltraShort DJ-UBS Crude Oil seeks to replicate daily results that are equal to twice (200%) the inverse or opposite of the daily performance of the Dow Jones-UBS Crude Oil sub-index.
• DTO – PowerShares DB Crude Oil Double Short ETN: This ETN tracks the double or 200% of the inverse of the daily performance of the Deutsch Bank Liquid Commodity Index. This index is composed of futures contracts of light sweet crude oil.

ETFs to Short Oil and Gas Companies

These ETFs will short oil companies like Anadarko Petroleum, Noble Energy, Occidental Petroleum, Exxon, Chevron, Schlumberger, Halliburton and Chesapeake Energy.

• DDG – ProShares Short Oil and Gas seeks daily results that correspond to the inverse or opposite of the daily performance the Dow Jones Oil and Gas Index. This index holds equities of the oil and gas industry including coal, oil companies, drilling equipment and services and pipeline companies.
• DUG – ProShares UltraShort Oil and Gas ETF tries to replicate twice (200%) the inverse of the daily performance of Dow Jones Oil and Gas Index.
• ERY – Direxion Daily Energy Bear 3X Shares: This ETF seeks to replicate 300% of the inverse or opposite daily performance of the Russell 1000 Energy Index.

Conclusion of Trading Falling Oil and Gas Prices

You do need to be careful with the double and triple leveraged ETFs. You can make considerable money in the short term but if oil and gas prices go up, you could also lose your money faster. These ETFs can be used for short time trading. If you believe oil and gas prices are about to rise again or keep rising, you can read How to Invest in Rising Oil Prices.

Copyright © April 2011 Sam Montana