The “Hormuz Hurricane” as I’ve referred to it, as driven by the U.S.-Israel strikes on Iran and the effective closure of the world’s most vital oil chokepoint, pushed Brent crude (CBM26) to a high of $120 per barrel. But history shows that when geopolitical premiums evaporate, they do so with violent speed.
When the war ultimately ends and the blockade is lifted, the trade isn’t just about exiting oil. It is about aggressively positioning for what we refer to as “mean reversion.” For those looking to profit from a collapse in energy prices, the following inverse and leveraged vehicles are the coiled springs of the market.
The “Short Oil” Toolkit: Betting on the Crude Crash
When the war premium that is currently deeply embedded in stock and commodity markets disappears, the price of a barrel typically falls much faster than it rose. These ETFs are designed to capitalize on that specific downward velocity.
ProShares UltraShort Bloomberg Crude Oil (SCO)
This is the heavyweight of the bear camp. It offers 2x daily inverse exposure to WTI crude oil (CLK26) futures. If oil prices drop by 5% in a single day as diplomacy takes hold, SCO is designed to jump by 10%.
And, since these ETFs are all double-edged swords (almost literally), that means the opposite can also be expected. That’s why I tend to think of leveraged ETFs more like surrogates for options exposure. SCO is a prime candidate for a massive recovery rally as oil retreats.
The “Energy Bear” Basket: Fading the Producers
Oil companies (XLE) have been the primary beneficiaries of the conflict, but their valuations are now stretched. If oil falls, the stocks that produce it will follow.
Direxion Daily Energy Bear 2X Shares (ERY)
This ETF provides 2x inverse exposure to the S&P 500 Energy Sector. It allows you to bet against the giants like Exxon (XOM) and Chevron (CVX). A return to “normalcy” could see ERY double in short order.
The “Strait Up” potential of these inverse ETFs comes with a major caveat: daily reset risk. These funds are designed for daily trading, NOT as long-term holding.
This is due in part to volatility decay. In a choppy market where oil moves 5% up one day and 5% down the next, leveraged ETFs lose value due to the math of compounding. You only win with these if the trend is a decisive, vertical move lower in oil. Again, think of them more like a type of option than an ETF.
There’s also the potential structural impact of backwardation reversal. The oil market has been in a state where near-term prices are higher than future prices, a sign of extreme scarcity. When the war ends, the market will shift back to “contango.” That’s when the price of a commodity for future delivery is higher than the current “spot” price. For example, if oil is $80 today, but the contract for delivery in one month is $82, the market is in contango.
This price gap exists because of the cost of carry. If you own physical oil, you have to pay for storage, insurance and financing. In a normal, healthy market with plenty of supply, the futures price reflects the spot price plus these storage and insurance costs. Therefore, an upward-sloping price curve is the “normal” state for most commodities. But the current environment is anything but normal.
Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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