After surging from about $35 per barrel at the end of 2008 to $70 at the halfway point of 2009, crude oil traded within a relatively tight range of $70 and $80 for the last eight months. But many analysts have become bullish on oil prices in recent weeks, anticipating a rally spurred by seasonal factors, strong demand from emerging markets, and an uptick in manufacturing and factory activity in the U.S.
Oil prices cracked through the $80 level on Monday, but that threshold has proven to be a difficult resistance level, and prices retreated to finish below $79. Crude once again teased the $80 mark on Tuesday, crossing over during morning trading. Some analysts who correctly called the breach of the $80 level anticipate crude prices going considerably higher, predicting prices of $100 per barrel by the summer.
Two major banks recently joined the crowd predicting $100 oil some time this year. Barclays expects crude prices to “flirt” with the $100 level in 2010, and anticipates an average price of nearly $140 per barrel by 2015. Analysts at Bank of America see crude touching $105 this year and believe $150 is attainable by 2014, thanks in large part to increases in demand from China and India. China recently overtook the U.S. as the world’s largest car market, despite significantly lower penetration rates. Approximately ten people in 1,000 own a car in China: the ownership rate in India is slightly higher at 12 per 1,000. By comparison, there are about 765 automobiles per 1,000 people in the U.S.
Some anticipate that a recovering economy and tightening supplies from refiners will push up prices as the U.S. driving season gets underway. Saudi Aramco, the world’s largest state-owned oil company, recently raised official selling prices for nearly all crude grades for U.S. customers.
ETF Plays For Surging Oil Prices
Predicting the direction of crude oil prices is a challenging task for many reasons. For starters, the valuation of an asset that pays no dividend and generates no cash flow is, at best, a blend of art and science. And most investors agree that there is a significant psychological component to oil prices, which is often exacerbated by the presence of speculators in the market. While a rise to $100 per barrel certainly isn’t a given, a number of investors seem to be lining up behind the so-called “experts.”
The correlation between crude oil prices and share prices of energy stocks has historically been a strong one, giving ETF investors a number of ways to make a play on rising oil prices. A number of funds, including XLE, IYE, and VDE, offer cheap, efficient exposure to “Big Oil” (see a complete list of energy equities here). But there are a handful of ETFs that present unique ways to play a rise in oil prices without making a major allocation to Exxon, Chevron, and the rest of the usual suspects. Below, we profile three of these ETF options (for more actionable ETF investment ideas, sign up for our free ETF newsletter)
United States Oil Fund (USO)
Perhaps the best “pure play” on crude oil prices, this fund is designed to track the movements of light, sweet crude oil (West Texas Intermediate). USO has become one of the largest exchange-traded commodity products in the world, swelling to nearly $2 billion in assets and trading more than 13 million shares daily. A word of caution on USO: while this fund is designed to track oil prices, it does so through a futures-based strategy, not by buying and holding barrels of oil. As such, the share price will generally exhibit a strong correlation with movements in spot crude, but may not always move in perfect lock-step. USO’s price is impacted by a number of factors, including the shape of the futures curve for crude oil and the timing of the “roll” process used to avoid taking possession of physical oil.
Emerging Markets Energy Titans Index Fund (EEO)
This ETF is designed to track the performance of oil and gas producers, equipment and services providers, and alternative energy companies in the developing world. In lieu of Exxon, BP, and Shell, major component companies include India’s Reliance Industries, Brazil’s Petrobras, and Russia’s Gazprom OAO. For investors concerned about the potential for an adverse regulatory impact on domestic oil firms if prices rise–the Obama administration had previously prepared a $15 billion “windfall profits” tax the last time crude prices spiked–EEO may present an interesting alternative. The tradeoff for the unique exposure offered by the fund comes in the expense ratio: EEO charges 0.85% annually, compared to fees as low as 0.21% for the Energy SPDR (XLE).
iShares Dow Jones U.S. Oil & Equipment Services Index Fund (IEZ)
This ETF is designed to track the performance of a benchmark that includes providers of equipment and services (such as drilling, exploration, engineering, and construction) to oil fields and offshore platforms. Big names in IEZ include Schlumberger, Halliburton, and Baker Hughes. Because the demand for services of these companies depends heavily on the profitability of oil producers, IEZ tends to maintain a strong correlation with XLE and crude oil prices.
Disclosure: No positions at time of writing.