Traders are making significant leveraged bets on a decline in oil prices, evidenced by a record $977 million inflow into the ProShares UltraShort Bloomberg Crude Oil ETF (SCO) in March. This represents the largest monthly haul for the fund since its inception in 2008. The SCO ETF provides twice the inverse of daily crude price movements, making it a high-risk vehicle for profiting from falling oil prices or hedging existing long positions.
Despite these substantial inflows, the SCO ETF experienced a 41% drop in March, its worst performance in nearly six years. This highlights the inherent risks of leveraged ETFs, especially in volatile markets. Oil prices had pulled back from recent highs after U.S. President Donald Trump announced intentions to wind down the Iran war.
The context for these bearish bets includes the hope among some traders for a reopening of the Strait of Hormuz and a swift normalization of supply. However, experts warn that damaged infrastructure and logistical challenges mean oil prices are likely to remain elevated. The Strait of Hormuz remains "practically closed," with tanker traffic significantly reduced, and major energy facilities in the region have sustained damage. The International Energy Agency estimates a loss of approximately 8 million barrels of crude per day from global markets due to the blockade, with many analysts forecasting Brent crude to settle between $80-$85 per barrel as a "new normal."
