Oil ETF Gets Boost From IEA Report

by on July 13, 2010 | ETFs Mentioned:

Given the murky regulatory environment hanging over the U.S. oil industry, as well as the general uncertainty surrounding the European economy, the price of crude oil has been remarkably stable. Front-month crude futures have traded between $70 and $80 since late May, a relatively tight range for a commodity that has touched levels as high as $140 and as low as $35 in recent years. An interesting trend in crude oil prices has developed; the commodity has moved in unison with equity markets recently, as traders perceive a strong relationship between the strength of the global recovery and the demand for oil.

Finally on Tuesday, a closely-watched report gave crude prices some direction; the International Energy Agency raised its estimates for global oil demand 2.1% higher to 86.5 million barrels per day. Somewhat surprisingly, the IEA, an adviser to primarily industrial nations, said that it sees oil demand in China and much of the rest of the world declining next year. “Whisper it quietly, but we might, just might, be in for some market stability for a while longer,” the IEA said [also read What Every Investor Should Know About Commodity ETF Investing].

Oil ETFs Get A Boost

The report gave a boost to oil prices, and many of the ETFs in the Oil & Gas ETFdb Category were up sharply in morning trading:

  • United States Oil Fund (USO): One of the largest ETFs offering exposure to crude oil prices, this fund invests in NYMEX futures contracts on light, sweet crude oil. Like many energy funds, USO invests primarily in near month contracts, rolling its holdings as expiration approaches. USO was up nearly 2.5% in late morning trading.
  • United States Brent Oil Fund (BNO): The recently-launched BNO offers exposure to Brent crude oil contracts traded on the ICE Futures Exchange.
  • PowerShares DB Energy Fund (DBE): This ETF tracks a rules-based index composed on futures contracts on some of the most heavily traded energy commodities in the world, including crude oil, heating oil, Brent crude oil, RBOB gasoline, and natural gas. DBE had added about 2.2% in late morning trading.

Word Of Caution

With prices hovering below $77, some investors may be tempted to make a play on oil, especially after the IEA announced that it expects oil prices to average $79.40 next year. But before jumping in to USO or another of the numerous funds offering exposure to crude prices, it’s important to pause and take a look at the futures curves. September light sweet crude oil futures were recently trading at a premium of 0.6% over August contracts, with October futures another 0.5% above above September futures. The upward slope remains intact beyond the end of this year; that means that if spot prices rise, investors in oil ETFs won’t necessarily see a big payday [also see What Oil ETF Cash Flows Tell us About Crude Prices].

Look for oil ETFs to be in focus again on Wednesday, as the U.S. Department of Energy is scheduled to release its weekly inventory data in the morning.

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Disclosure: No positions at time of writing.