Market Overview

Strategic Petroleum Reserve: ETF Winners And Losers (XOP, DTO, UGA)


Speculation has been increasing in recent days that President Obama will tap the Strategic Petroleum Reserve in an effort combat high gas prices and that scuttlebutt has hampered oil futures this week. This rumor isn't surprising and it could easily morph from speculation to reality for the simple reasons that gas prices are uncomfortably high and this an election year.

For better or worse, some would argue it should be called the "Strategic Political Reserve" and with the United States Gasoline Fund (NYSE: UGA), an ETF that tracks NYMEX unleaded gasoline futures, up almost 19% year-to-date, it's not surprising some politicians would endorse an SPR release.

The U.S. holds almost 700 million barrels of oil in its strategic reserve, about enough to supply the country for five weeks. It should be noted there have only been three previous SPR releases: During Operation Desert Storm, after Hurricane Katrina and then last year as political violence escalated in Libya, resulting in a major production decline for that OPEC member.

For traders, an SPR release amounts to a "buy the rumor, sell the news" event and these are the ETFs that should be in play.

ProShares UltraShort Oil & Gas (NYSE: DUG) The ProShares UltraShort Oil & Gas is a short oil and gas equities, not futures, play, but using past performance as our guide, the ETF has an interesting track record. Last year, the SPR rumors started in early March, helping send DUG higher by about 6% by the middle of the month. By the end of April, DUG was down almost 10%.

In June 2011, the month the SPR announcement was actually made, DUG shot up almost 15% in the first few weeks of the month only to be back to even by the time June closed. We didn't say it would be easy, but DUG is definitely one ETF that is trade-worthy around SPR headlines.

United States Gasoline Fund (NYSE: UGA) Considering UGA is by now a well-known ETF, it's average daily volume of less than 102,000 shares is arguably less than it should be. The current bid/ask spread is a nickel, so be aware of that if you're thinking UGA is the short of a lifetime if an SPR release comes to pass.

Yes, June 2011 was a tough month for UGA. From peak to trough, the ETF lost about 6%. However, the better trade was to go long UGA after the SPR news was confirmed. From late June 2011 through late July 2011, UGA jumped almost 12%.

SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) Speaking purely from a trader's perspective, the SPDR S&P Oil & Gas Exploration & Production ETF is one fund that can be a world of fun around SPR news. Just look at this track record. In the first half of March 2011, XOP dropped 5%. Over the next three weeks, XOP gained over 10%. Those gains were given back in a matter of weeks.

In June 2011, XOP plunged 10%, but in the weeks immediately following the SPR, XOP soared higher. The gains were rapid as XOP, as it has a tendency to do sometimes, acted almost like a leveraged ETF.

PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) When it comes to SPR headlines, the PowerShares DB Crude Oil Double Short ETN, might be the epitome of "buy the rumor, sell the news," placing an added burden on traders to get the timing just right. From June 2-24, 2011, DTO gained about 20%, but once the SPR news became official, the wind was taken out of DTO sails quickly. DTO is a short-term trade, not an investment.

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