By Kevin Grewal
With a weak U.S. dollar, high unemployment numbers and the continuous growth of emerging markets, the energy sector, in particularly, crude oil will likely continue to remain attractive.
The first reason crude oil is gaining attention is because of the weakness of the dollar. The relationship between the U.S. dollar and crude oil in generally an inverse one, meaning that as the dollar continues to devalue, crude oil goes up. A weak dollar makes crude oil more affordable and that much more attractive to foreign investors who are jumping at the chance to buy the commodity.
Secondly, microeconomic factors remain favorable for driving up the price of black gold. From a supply perspective, the Organization of Petroleum Exporting Countries (OPEC) has imposed major production cuts and the non-OPEC producing countries have bumped up production but are still unable to make up the difference caused by the production cuts put in place by OPEC.
As for demand, emerging countries continue to grow and are driving the uptick in demand. In fact, the International Energy Agency (IEA) recently stated that world crude consumption is on the track to grow in the fourth quarter of this year and this growth is being driven by emerging market demand. The agency further stated that it expects global oil demand to rise to 86.2 million barrels a day in 2010, marking an upward revision of 140,000 barrels per day from its previous report.
What makes crude oil even more appealing is that consumption in the U.S., a nation that is still emerging from the global financial crisis, is expected to rise by 0.4% in 2010 after witnessing a contraction of 3.7% in this year. If the present rate of production is held steady and consumption grows in conjunction with the IEA’s forecast, then crude oil inventories in developed nations are likely to drop below the 60 days of forward cover resulting in more price pressures.
Movements in the price of crude oil can be capitalized through the SPDR Select Energy Sector (XLE), which holds integrated oil companies, oil service stocks, oil exploration companies and refiners. In fact, Exxon Mobil (XOM) and Chevron (CVX) comprise nearly 30% of its total asset base. XLE is up 51% from a March low of $38.12 to close at $57.57 on Tuesday.
Another play is through the US Oil Fund (USO), which is up 73% from a February low of $22.86 to close at $39.62 on Tuesday.
Lastly, crude can be played through the iPath S&P Crude Oil Ttl Ret Idx ETN (OIL), which is up 79% from a February low of $14.64 to close at $26.16 on Tuesday.
When investing in crude oil it is important to understand the volatility and risks that are involved. A good way to mitigate these is through the use of an exit strategy. According to the latest data from www.SmartStops.net, an upward trend in the aforementioned ETFs could come to an end at the following price points: XLE at $56.17; USO at $37.27; OIL at $25.34. These price points change on a daily basis due to market fluctuations and updated data can be found at www.SmartStops.net