Commodities

Weak Dollar Could Boost Oil ETFs

As commodities like cotton, wheat and copper have witnessed price surges this year, the actions and decisions of the Federal Reserve combined with sustainable global demand could boost crude oil providing positive price support to the United States Oil Fund (USO), the United States 12 Month Oil Fund (USL), the PowerShares DB Oil Fund (DBO) and the iPath S&P GSCI Crude Oil TR Index ETN (OIL).

The Federal Reserve’s decision to infiltrate the US economy with extra dollars through its purchasing of $600 billion of Treasuries from commercial banks is expected to keep interest rates at near record lows and further weaken the US dollar.  As a result, black gold, which is traded in dollars, is expected to become cheaper and hence more attractive to foreign investors.  History indicates that the US dollar and the price of crude oil hold an inverse relationship; as the dollar depreciates, crude oil tends to witness an inflow of assets, pushing demand and prices up.

Furthermore, as the dollar depreciates, the 12-member cartel known as the Organization of Petroleum Exporting Countries (OPEC), may seek increased oil prices to make up for lost profitability from exporting of oil.  In fact, according to Mark Shenk and Grant Smith of Businessweek, Saudi Arabia’s Oil Minister has already hinted that a range of $70 to $90 a barrel should be satisfactory for consumers, an increase from the world’s largest oil producer’s previous price target of $75 barrel. 

In addition to a weak dollar, global demand of crude is expected to increase. The International Energy Association (IEA) expects global consumption of crude oil to increase from 86.9 million barrels per day to 88.2 million barrels per day in 2011 based on stronger-than-expected economic growth in Europe and industrialized Asia.  In Asia, China’s demand for crude is expected to rise by more than 4 percent next year and India is expected to increase its appetite for crude due to an expanding manufacturing sector.

On the supply side, it appears that there is ample global supply to meet this increased demand; however, stockpiles could eventually start to diminish if OPEC keeps production at its current rates and economic growth supersedes expectations.  With this in mind, a microeconomic imbalance is highly unlikely to emerge in the near term future. 

Although an opportunity seems to exist in black gold, it is equally important to consider the inherent risks involved with investing in such a volatile commodity.  To help mitigate these risks, the use of an exit strategy is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Categories: Commodities, ETFs, Recent Articles

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