How to Play Rising Energy Prices With Oil ETFs

January 27th at 1:00pm by Tom Lydon

You’ve probably noticed that your energy costs are going up. Those in the know believe that the fundamentals will keep pushing them higher. Now’s your chance to combat rising prices with exchange traded funds (ETFs).

How crazy is it getting?

  • Brian Hicks, co-manager of U.S. Global Investors Global Resources Fund, expects crude oil prices to continue to rise on stronger economic growth, no real increase in non-OPEC crude oil production and newer production that comes from high-cost areas such as deepwater drilling, reports Ben Baden for U.S. News & World Report. [Oil Exploration ETFs Could Jump on Round of Spending.]
  • Meanwhile, the U.S. Department of Energy recently upped its global oil consumption outlook to a record 55 million barrels a day for 2011, with most of the demand coming from emerging markets like China and India. The Department of Energy adjusted upward its average oil prices projections to around $93 a barrel for 2011.
  • Craig Hodges, co-manager of the Hodges Funds, on the other hand, predicts oil will stay between $90 and $100 this year, followed by a higher spike in 2012.

If you would like to invest in oil, you may consider investing in oil ETFs that track a basket of futures contracts. PowerShares DB Oil (NYSEArca: DBO) and United States Oil (NYSEArca: USO) both track a basket of futures based on the price of oil. It should be noted that the funds don’t mimic the spot price of oil since investors have to pay a premium to invest in futures. And when the market is in contango, look out: it could negatively impact your ETFs.

If the futures market isn’t what you had in mind, ETFs that track indexes of oil production and services companies, like iShares Dow Jones U.S. Oil & Gas Exploration & Production ETF (NYSEArca: IEO), PowerShares Dynamic Oil & Gas Services (NYSEArca: PXJ), and SPDR S&P Oil & Gas Equipment & Services ETF (NYSEArca: XES) might be more up your alley.

Now with oil above $90 a barrel, and the global demand still strong, earnings should be very strong with these companies. [Oil ETFs: 2008 All Over Again?]

For more information on oil, visit our oil category.

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.