Where Oil ETFs Are Headed Next

October 4th at 3:00pm by Tom Lydon

The price of oil is starting to creep up again as “less bad” data from the United States gives investors something to trade on. The future of oil prices and related exchange traded funds (ETFs) is based on the fundamentals of supply and demand, but it is up to the investor to interpret the situation accordingly.

Oil prices crossed $80 per barrel last Friday after better economic data from the U.S. signaled a healthier appetite for oil, reports Alex Kennedy for The Associated Press. Additionally, the Energy Information Administration also said that commercial crude inventories dropped 500,000 barrels last week.

According to Robert Huebscher for Advisor Perspectives, today’s price of oil is the normal price while record high prices experienced in 2008 were the result of very high volatility. Nevertheless, working capital reductions, diminished trade and manufacturing all helped drop demand for oil, which brought prices back down. [Oil and Gas ETFs Feeling the Push-Pull.]

Meanwhile, “demand destruction,” or changes in habit, altered lifestyle, innovations or substitutions, has kept the price of oil suppressed. For the long term, industrialization and urbanization will continue to produce growth in oil demand, but increased efficiency in the future could help reduce the rate of demand increase. Huebscher expects long-term forecast growth rates of oil consumption to drop to around 1.2% per year from the current 1.6%.

The oil industry, or the oil supply side, is also affected by cost-effective projects that are constrained by the price or future price of oil, tax and royalty due to governmental owners of resources, stability of global economies, and reduced exploration of new resources. [Oil ETFs Hit By Supply Glut.]

Huebscher expects oil prices to remain between $65-$80 over the next few years on slower global growth that will suppress demand as supply remains relatively the same. If growth increases between 2012-2015, prices may jump past $100 per barrel, which requires 3%-4% annual demand growth in non-OECD countries and stable consumption in OECD countries, adds Huebscher.

For the short-term, investor should look out for geopolitical risk, credit issues, and other potential dislocations, while for the long-term, investors would consider the correlation with overall global growth.

For more information on oil, visit our oil category. There are a number of ways to play oil prices via ETFs – 17, according to the ETF Analyzer, including these three that own futures contracts:

  • United States Oil Fund (NYSEArca: USO)
  • United States 12 Month Oil (NYSEArca: USL)
  • PowerShares DB Oil Fund (NYSEArca: DBO)

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.