5 Factors Benefiting Oil ETFs and How to Play It
October 29th 2009 at 1:00pm by Tom Lydon
Global economies are growing fast and monetary policy in the United States is loose. These and other factors are fueling the rise of exchange traded funds (ETFs) related to the oil industry.
- Low interest rates. The great increase in global money supply has fueled oil-intensive growth and consequently, pushed up oil crude prices, comments Martin Hutchinson for Money Morning. Many countries have kept interest rates low, and they don’t expect to change it anytime soon. (More money being reinvested into commodities).
- More cars. China and India’s burgeoning auto industries are producing an expected 11 million and 2.5 million cars, respectively, while Brazil’s auto sales surged 20% in September. This translates into increased demand for oil.
- Weak U.S. dollar. The price of oil and the dollar historically have an inverse correlation; oil is priced in dollars, so as it weakens, oil becomes cheaper for foreigners. As the U.S. government takes on more debt, investors are predicting a further depreciation of the dollar. (Oil trading without the dollar)
- The economy. Some believe the worst is over, and oil will soon benefit from a more active economy with higher energy consumption, remarks Dave Mock for The Motley Fool.
- Scarcity. Oil bulls argue about a “peak oil,” where the peak of global oil production will finally be seen. Oil, like other commodities, is a finite resource.
There are several ways to play oil. Some ETFs hold shares of major oil companies, such as Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). These companies range from oil exploration, to refining, to production. Examples include:
- PowerShares Dynamic Energy (NYSEArca: PXI): up 32% year-to-date
- SPDR S&P Oil & Gas Exploration & Production (NYSEArca: XOP): up 32.5% year-to-date
There are also oil ETFs that hold futures contracts. ETFs that hold futures give investors the chance to capitalize on oil prices without having to worry about rolling over contracts or taking delivery. For more information on oil, visit our oil category.
- United States Oil (NYSEArca: USO): up 19.2% year-to-date
- PowerShares DB Oil (NYSEArca: DBO): up 40.2% year-to-date
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.