ETFs to Hedge or Profit from Higher Oil Prices

June 11th at 2:19pm by Tom Lydon

Oil prices have slid on the outlook for weak economic growth on a global scale, and stagnating fundamentals in the United States. Oil focused exchange traded funds allow investors to play both the upside and downside of movements in oil prices.

“Higher oil production and weakness in economies around the world that are now burning less gasoline and other fuels have helped push down crude prices 14% in the last month and 25% from a high in February. Reports in recent days of weak job growth in the U.S., a deepening financial crisis in Spain and slowing growth in China have rattled markets,” Jonathon Fahey for Bloomberg BusinessWeek wrote.

Many analysts are anticipating that crude oil has reached a bottom, and could lead higher for the rest of 2012. The latest oil price estimates range from $104 per barrel to $200 a barrel, reports Larry D. Spears for Resource Investor. [ETF Chart of the Day: Oil]

ETFs can give investors the exposure to oil they seek without the need for a commodity account. Plus, there are ETFs to play both directions of oil prices.

  • United States Oil (NYSEArca: USO) The managers invest the partnership’s pooled assets in a variety of vehicles, from oil and gas futures and forward contracts to cash-settled energy options, the goal being to match the performance in percentage terms (less expenses) of the spot price of WTI crude.
  • PowerShares DB Oil Fund (NYSEArca: DBO) This fund uses investments in futures over various time frames to track the price and yield performance of the Deutsche Bank Liquid Commodity Index, which is structured to mirror the percentage change in WTI crude prices.

For those investors that are bearish on the price of oil rising, there is the ProShares UltraShort DJ-UBS Crude Oil ETF (NYSEArca: SCO). The fund invests in short futures positions and put options in an effort to produce a daily return twice as large (200%) as the percentage drop in oil prices. When oil prices go down, SCO’s share price goes up by twice the percentage. [Oil ETFs: 2008 All Over Again]

Investors that are bearish on oil prices rising in 2012 are so due to the slowdown in oil demand from shippers, planes and  travelers. As oil supply has risen over the past few months, the stockpile will not allow a quick ascent in energy prices. [Oil ETFs Rise on Supply Concerns]

The recent drop in oil prices is down 21.8% from May 1 – June 1, the biggest monthly drop since December of 2008, reports Spears. In one month, oil went from $106.50 to $83.23 a barrel, indicating there could be opportunity for investors that are bullish on energy. [ETF Chart of the Day: Energy Sector Sell-Off]

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.