by Susan J. Aluise | October 25, 2011 7:00 am
“Oil is like a wild animal,” oil tycoon J. Paul Getty once said. “Whoever captures it has it.” It doesn’t matter much whether that wild animal is a bull or bear: Investors who end up on the wrong side of black gold’s price volatility have their share of war wounds to show for it. Since it’s difficult to predict the future, getting a little protection from the ebbs and flows of oil prices is prudent — and short oil funds are one interesting play for wild times like these.
Here’s why: Oil prices have swung from a high of more than $110 a barrel in early May to $82 in August — and had inched back up to above $90 by Monday. Oil price volatility is extremely tough to manage, even for experts. Consider the airline industry, which saw its fuel bill skyrocket by $1 billion in the first quarter. But when prices fell, airlines’ fuel hedges went south, wreaking havoc with third-quarter earnings. Fuel hedge losses were enough to turn Southwest Airlines‘ (NYSE:LUV) $205 million profit from the third quarter of 2010 into a $140 million loss for the same quarter this year.
There’s no magic 8-ball that can predict what direction oil prices are going. On one hand, Asian economies — particularly China and Japan — are getting back on track. On the other hand, Europe is not out of the woods yet in its debt crisis, and the dollar is gaining ground — both factors are likely to depress oil prices. A Libya without strongman Moammar Gadhafi could increase production, lowering prices. But the impact of a Libya under Shariah law could have unintended consequences for oil supply and production.
So how can short oil funds help investors when oil prices are so unpredictable? Short (or inverse) oil funds are a bearish play, designed to protect investors from a slide in oil prices — and a selloff in oil stocks. Here are four short oil funds to consider:
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.
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