Oil ETFs Retreat, But Will It Stick?

February 28th at 11:00am by Tom Lydon

Phew. Crude oil prices are finally cooling off as reports of increased production are emerging from the Middle East. The United States Oil Fund (NYSEArca: USO) exchange traded fund (ETF) is flat so far this morning – quite a reversal from a busy week last week that saw it gain 10%.

Those gains had some wondering what the importance of Libyan oil was. After all, not much of it actually comes here. [ETF Options for Volatile Times.]

Clifford Krauss for The New York Times reports that analysts estimate that as many as a million barrels of Libyan oil a day have been removed from world markets in recent days. Investors are aware that more oil production could be disrupted if the unrest spreads to other crucial producing nations, like Algeria. The danger is that if oil prices continue to increase, it could hinder any beginnings of an economic recovery in developed and emerging markets. [Russia ETFs Get a Kick As Oil Soars.]

Although Libya’s oil accounts for only 2% of the U.S. supply, its quality is very high. Libya’s “sweet” crude oil can’t easily be replaced in the production of other fuels.

Today, oil is retreating, but if things remain in disarray, the price of oil may have nowhere to go but up. Even if it doesn’t remain elevated, prices are still expected to be volatile, so unless you’ve got the stomach, you may want to wait it out. If you do have the stomach, ProShares UltraShort Oil & Gas (NYSEArca: DIG) could be a hedge worth looking at.

Tisha Guerrero 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.

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