By Kevin Grewal
As the new year has kicked off in full swing, supply and demand forces have bolstered the energy sector, which is expected to prosper for the year, and for good reason.
From a demand perspective, recovering global economies have spurred demand for energy producing commodities like crude oil and natural gas. With most dominant global economies expected to show single digit GDP growth in 2010 and some emerging economies double digit growth, the demand for energy producing commodities is likely to be sustained at a relatively high level.
Both China and the United States, the world’s two largest energy consumers, have already showed healthy expansion in the manufacturing sector. China’s manufacturing is expanding at its fastest rate in the last five years and according to the Institute of Supply Chain Management’s factory index, which rose to a 55.9 in December, the United States is in expansion mode as well.
A second force that has been spurring demand is freezing weather. In the United States, colder than normal temperatures have been hovering over the Northeast and are expected to continue for the next few weeks. Additionally, Asia is witnessing an extremely cold winter with record snowfall. In fact, parts of China and South Korea are seeing their heaviest snow fall in over 60 years with temperatures expected to dip as low as -32 degrees Celsius. Additionally, parts of northern and eastern India are witnessing one of their worst winters with many dying from the cold.
As for supply, U.S. heating oil inventories are expected to drop for the seventh straight week and according to the U.S. Energy Information Administration, storage of working natural gas is slowly diminishing. Additionally, the Organization of Petroleum Exporting Countries (OPEC) has openly stated that it doesn’t expect to increase oil production in the near future and will likely sustain its current production levels.
Lastly, political instabilities around the world have been threatening supply. Talks between Russia and Ukraine, which potentially could hinder oil supply to Europe, finally came to an end with a 30% increase in transit tariffs on oil transported to Europe. Additionally, protests in Iran, the world’s second largest oil producer, have been escalating and the nation is threatening to possibly suspend oil exports if tensions continue to escalate.
In a nutshell, both supply and demand forces are likely to make both crude oil and natural gas attractive commodities. ETFs to watch include:
- the US Oil Fund (USO), which is a play on crude oil futures contracts and closed at $40.27 on Monday.
- the US Natural Gas Fund (UNG), which is a play on natural gas futures contracts up and closed at $10.64 on Monday
- the iShares Dow Jones US Oil & Gas Exploration Index (IEO), which gives exposure to companies like Chesapeake Energy (CHK) and XTO Energy (XTO). IEO close at $56.05 on Monday.
When investing in these equities, it is important to keep in mind the inherent risks involved. A good way to mitigate these risks is through the use of an exit strategy which triggers price points at which an upward trend could potentially be coming to an end. According to the latest data at www.SmartStops.net, the price points for the aforementioned ETFs are: USO at $38.24; UNG at $9.55; IEO at $52.17. These price points change on a daily basis as market conditions fluctuate and updated data can be accessed at http://www.SmartStops.net.