Volatility is nothing new for crude oil prices, which can be swayed by a wide range of factors, ranging from fundamental supply and demand levels to speculative behavior. In a recent memo, the International Energy Agency indicated that global oil demand is expected to rise at a higher rate than previously anticipated over the next year as the economic recovery moves along.
World demand for 2009 is expected to be 84.6 million barrels per day, an increase of 200,000 barrels from the previous forecast but still 1.7 million barrels below 2008 levels. “Things are looking better from an economic perspective,” said David Fyfe of the IEA, an energy adviser to the U.S. and other oil-consuming nations.
Beyond 2009, demand is expected to rise on the strength of emerging market economies, particularly China. Crude consumption is expected to increase 1.4 million barrels per day to 86.1 million. While this represents significant growth from 2009, such demand would be on par with 2007-2008 levels.
Not surprisingly, there are very different opinions as to the direction of crude oil prices. Some analysts believe that demand fundamentals are too weak to support current $70 per barrel levels, particularly given the precarious state of the economic recovery in many oil-thirsty countries. Many traders have positioned themselves to profit from a pullback in oil prices, betting crude will drop below $60 per barrel in the short term. Higher stockpiles relative to year ago periods have some betting that a downward correction is inevitable.
Others believe crude is poised to skyrocket. In a recent research note, BOA-Merrill Lynch said prices may climb above $100 per barrel next year as demand rebounds in emerging markets and investors look to hedge against a further slide in the value of the U.S. dollar. Some have also pointed to Exxon Mobil’s renewed efforts to expand its reserves in Ghana and elsewhere as an indication that the industry is bullish on oil prices over the long term.
ETF Plays on Crude Oil
- United States Oil Fund (USO): This ETF invests in futures contracts in an attempt to track the spot price of light, sweet crude oil delivered to Cushing, Oklahoma. USO has jumped by nearly 15% so far in 2009, but still remains far below year ago levels.
- PowerShares DB Crude Oil Short ETN (SZO): For investors skeptical of the strength of the global recovery and bearish on crude oil prices in the short to intermediate term, SZO presents an interesting investment option. SZO offers inverse exposure to crude oil prices, and has fallen by almost 25% so far in 2009.
- Energy Select Sector SPDR Fund (XLE): This ETF doesn’t invest directly in commodity futures, but rather companies engaged in the oil and gas industry. XLE’s largest holdings include Exxon Mobil (19.2%), Chevron (12.7%), and Schlumberger (6.7%).
Disclosure: No positions at time of writing.