Oil and Gas ETF Plays for Rising Energy Prices
March 9th at 12:00pm by Tom Lydon
Uh-oh…you’ve probably noticed that gas prices are once again creeping higher, just in time for the driving season. As a motorist, it might have you cringing; but as an exchange traded fund (ETF) investor, it might have you looking for an opening.
Gas has already crept up 5 cents a gallon, and it could go as high as $3 a gallon if those in the know are correct. Oil prices have also increased, to $82 on optimism about the economy, new tensions in oil-producing Nigeria and reports that China is building up its strategic reserves, reports Clifford Krauss for The New York Times. [Energy ETFs: Oil Industry Expands Its Horizons.]
The Nigerian rebel group have resumed attacks on oil production operations, which has diminished Nigerian production by 85,000 barrels a day, or more than 4% of normal output. China is planning on amassing reserves while prices are low, increasing the expectations that China may import as much as 15% more oil this year.
Global crude oil inventories are slowly dwindling, but domestic inventories remain above the five-year average for this time of year. It is expected that OPEC won’t be altering its supplies later this month. [How to Use HOLDRS to Invest in Oil.]
How to play these rising prices? You have an array of options with oil ETFs.
For more information on oil, visit our oil category.
- United States Oil (NYSEArca: USO): Holds futures contracts; watch out for contango, though, because this fund could get hit on the roll. If it’s present, then investigate United States 12-Month Oil (NYSEArca: USL), which is less impacted by the situation.
- United States Gasoline (NYSEArca: UGA): Holds futures contracts; as with USO, watch for contango. There is no 12-month gasoline fund, however.
- SPDR S&P Oil & Gas Equipment & Services (NYSEArca: XES): Holds stock of companies involved in oil equipment. While it won’t correlate with the spot price, it does offer industry exposure and less volatility.
- SPDR S&P Oil & Gas Exploration & Production (NYSEArca: XOP): Tracks companies involved in the exploration and production of oil and like XES, doesn’t correlate with the spot price, but gives good exposure to the industry.
- iShares Dow Jones U.S. Oil and Gas Exploration (NYSEArca: IEO): Like XOP; gives exposure to companies involved in the production and exploration of oil and other energy commodities.
- Ultra Oil & Gas ProShares (NYSEArca: DIG). If you believe those prices are going to continue to go up and you want to maximize your exposure, this is one way to do it. Just be sure you know how leveraged ETFs work before you leap. [Our Guide to Leveraged and Inverse ETFs.]
Max Chen contributed to this article.
