Crude oil prices have been in a well-documented freefall over the last month, as prices have been hammered by a surging dollar and worries about softening demand from Europe. But prices got a boost on Thursday, as the International Energy Agency raised its predicted oil demand for 2010 by 60,000 barrels a day. At the same time, the organization expressed concerns about the U.S. reaction to the Gulf oil spill. According to the IEA, if a U.S. drill ban is put into place, output in the Gulf of Mexico will drop anywhere from 100,000 to 300,000 barrels a day by 2015. The prospects for strengthening demand and slumping supplies sent prices sharply higher on the day. The scenario presented by the IEA contrasts with the Organization of Petroleum Exporting Countries’ prediction that demand will drop by 10,000 barrels a day for 2010.
The bullish demand report gave a badly-needed boost to both futures contracts and energy stocks, both of which have been pummeled in recent weeks. If the demand were to increase as the IEA predicts, rising oil prices could translate into stronger bottom lines for energy companies. Moreover, if the offshore drilling ban were to be extended in the U.S., the cut in supply could further firm prices. On the other hand, if OPEC’s prediction is correct, then oil prices will likely drop, negatively impacting any ETFs with oil allocations.
So Far, So Good
The United States Oil Fund (USO), one of the largest exchange-traded commodity products, was one of the major beneficiaries from Thursday’s developments. USO was up more than 2% in late afternoon trading, clawing back some of the ground lost in recent sessions.
USO offers investors exposure to crude oil prices by investing in exchange-traded futures contracts. As crude oil prices have slipped, the fund’s size has expanded considerably as investors sought out ways to bet on a recovery in prices; USO saw cash inflows of $773 million in May, almost 50% of total assets at the end of the previous month (see What Oil ETFs Inflows Tell Us About Crude Prices).
USO wasn’t the only fund to get a boost on Thursday; nearly every ETF in the ETFdb Oil & Gas Category was up at least 1% today, a welcome development for the downtrodden oil industry.
The events of coming weeks could be instrumental in determining the direction of crude oil prices. If the offshore drilling ban is extended and demand picks up, look for prices to continue the rally. But if OPEC is correct, a downward correction could be on the horizon, and a prolonged period of low prices may be ahead.
Disclosure: No positions at time of writing.