oil etfs

Executive Summary

  • Oil prices will remain dynamic as rising consumption competes for production that is bumping up against short-term capacity limits.
  • Exposure to oil can be achieved via spot price or futures contracts:

Spot Price: USO

Futures: OILDBOUSL

 

Investment case

Highlights from the Energy Information Agency’s Short Term Outlook – September, 2009.

Global Petroleum Overview.  WTI oil prices hovered in the $67-to-$74-per-barrel range in August as expectations of an economic recovery and higher oil consumption in the future were weighed against weak current demand and high inventories.  As long as oil prices remain in their current range, EIA expects the Organization of the Petroleum Exporting Countries (OPEC) to maintain its existing production targets.

Global Petroleum Consumption. 
Preliminary data indicate that global oil consumption declined by 3 million barrels per day (bbl/d) in the second quarter of 2009 compared with year-earlier levels.  Members of the Organization for Economic Cooperation and Development (OECD) accounted for most of the decline; total non-OECD consumption was virtually unchanged.  The current macroeconomic outlook assumes that the world economy begins to recover at the end of this year, led by non-OECD Asia.  As a result, EIA expects world oil consumption to grow in the fourth quarter of 2009 compared with year-earlier levels, the first such growth in 5 quarters.  Projected world oil consumption grows by 0.9 million bbl/d in 2010, with relatively strong growth in non-OECD countries being partially offset by a slight decline in OECD consumption.

Non-OPEC Supply.  Total non-OPEC supply averaged 50.1 million bbl/d in the second quarter of 2009, about 0.3 million bbl/d higher than in the second quarter of 2008.  The largest amount of growth came from Central and South America (0.3 million bbl/d) and the Former Soviet Union (0.3 million bbl/d), which was offset by a 0.3 million bbl/d decline in Europe.  Over the forecast period, higher output from Brazil, the United States, Azerbaijan, Kazakhstan, and Canada offsets falling production in Mexico and the North Sea.

OPEC Supply.  OPEC crude oil production was 28.7 million bbl/d in the second quarter of 2009, similar to first quarter levels, but down 3 million bbl/d from peak production in the third quarter of 2008.  The combination of higher prices and OPEC’s historical tendency for weaker compliance with production targets over time (see This Week in Petroleum, August 12, 2009) suggests that OPEC crude oil production could rise over the remainder of the year, unless prices fall sharply from current levels.  Projected OPEC crude oil production climbs to 29.3 million bbl/d in the second half of 2009, then averages 28.9 million bbl/d in 2010.

Global Petroleum Inventories.  Based on preliminary data, OECD commercial oil inventories stood at 2.74 billion barrels at the end of the second quarter of 2009.  At 61 days of forward cover, OECD commercial inventories were well above average levels for that time of year (Days of Supply of OECD Commercial Stocks Chart).  EIA expects OECD oil inventories to remain at above-average levels throughout the forecast period because of weakness in global oil consumption and continuing contango in the futures market, i.e., relatively high future prices compared with current prices.

Crude Oil Prices
.  Equity-market and exchange-rate expectations continue to be cited by market analysts as proximate causes of oil-price behavior, in addition to changing expectations of global oil consumption growth.  EIA projects that WTI crude oil prices will average $69 per barrel in the second half of 2009, $19 per barrel lower than in the second half of 2008 (Crude Oil Prices Chart).  This projection is largely unchanged from last month’s Outlook and reflects the view that an expected economic upturn will restore oil demand growth and gradually work off the surplus oil inventories.  Although a consensus seems to be forming that the global economic downturn may have bottomed out, there still remains considerable uncertainty regarding the timing and pattern of any economic recovery.

The EIA’s Short Term Energy Outlook is published monthly and is available at http://www.eia.doe.gov/steo.

 

Overview

Whether you believe the price of oil is going to continue to rise or is poised for a fall, oil ETFs are a good way for investors to establish exposure to dynamic oil prices.

Oil ETFs offer exposure to the spot price of oil (the price you would pay today) or exposure to the future price of oil.

The United States Oil Fund (USO) tracks the spot price of crude oil using futures contracts and other oil related futures, forwards, and swap contracts. The fund is marginable and short selling is allowed. Options on USO are also available.

Barclay’s iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) tracks an index of crude oil futures contracts that are at least 5 months from expiration. ETN stands forExchange Traded Note which means that you are buying an unsecured debt security.

In addition, the United States 12 Month Oil Fund (USL) is an exchange-traded commodity pool that is designed to track the price movements of oil. The fund uses a series of benchmark future contracts on crude oil to have the changes in percentage terms of the units’ net asset value reflect the changes in percentage terms of the price of light, sweet crude oil.

Another choice for gaining exposure to oil with futures contracts is thePowerShares DB Oil Fund (DBO).

Indirect positions can be established with sector ETFs. For example, see the ETF Theme Investing in Oil and Gas Services with ETFs.

 

Top Performers

Largest Spot Price Fund

United States Oil Fund (USO)

Largest Futures Fund

iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)

 

See the directory.