ETFs

4 Reasons To Watch Oil

By Kevin Grewal

Yesterday, crude oil rose from a three-week low as contracts for February delivery surpassed $79 a barrel on the New York Mercantile Exchange igniting an uptrend that many suggest is likely sustainable throughout the year.

Mere fundamental supply and demand forces are likely to bolster black gold as economies around the world rebuild and grow.  In fact, the U.S. Energy Information Administration (EIA) expects that the global economic recovery will contribute to global oil demand growth of 1.1 million barrels per day, with non-OECD countries accounting for the majority of this growth.

Additionally, anticipated economic growth in both China and the United States, the world’s two largest consumers of crude, will likely further bolster its appeal.  In fact, China is expected to increase consumption by nearly 400,000 barrels per day in the new year.

From a supply perspective, both OPEC and non-OPEC oil producers are expected to keep production levels relatively steady.  Additionally, large declines in production seen in Mexico and in the North Sea are expected to offset increases in crude supplies that resulted from weaker demand in 2009 caused by the economic downturn.

Lastly, political instabilities could hinder the supply and flow of crude, especially in parts of Europe and Latin America. In a nutshell, production of crude will likely not increase in the coming year further providing price support for the commodity.

These micro and macroeconomic factors, combined with speculative trading, which is common in the crude markets has lead to the EIA to forecast the price of West Texas Intermediate (WTI) crude oil to average above $80 per barrel in 2010; this forecast is nearly a 30% increase from the average price of WTI in 2009.

Ways to play black gold include the following:

  • the US Oil Fund (USO), which closed at $38.93 yesterday
  • the iShares Dow Jones US Oil & Gas Exploration (IEO) closed at $56.07 yesterday.
  • the Energy Select Sector SPDR (XLE), which closed at $59.80 yesterday
  • the ProShares Ultra Oil & Gas Fund (DIG), which gives leveraged exposure to the crude markets and closed at $37.51 yesterday.

When investing in commodities like crude oil, it is important to keep in mind the volatility and risks involved, in addition to the possibility that the global economic recovery may fall short of expectations which will likely hinder crude’s demand.

A good to way to protect against these risks is through the use and implementation of an exit strategy which triggers price points which represent abnormal price weaknesses in crude and indicate that further price weaknesses are likely to follow.

According to www.SmartStops.net, the price points for the previously mentioned ETFs are: USO at $38.19; IEO at $53.94; XLE at $57.75; DIG at $35.38.  These price points fluctuate on a daily basis and are reflective of market conditions and volatility. Updated data can be found at www.SmartStops.net.  These price points change on a daily basis as market conditions fluctuate and updated data can be accessed at http://www.SmartStops.net.

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