According to this year’s 2009 volume of the International Energy Agency’s (IEA) World Energy Outlook, the recession and financial crisis provided us a small respite from our insatiable fossil fuel demand and rising oil prices, remarks Dave Fessler for Investment U. However, the break in oil prices is forecast to end this year and a new growth pattern may start. The IEA projects that world consumption will grow 1% per year till 2030. (Oil ETFs are not over yet).

Possible shortfalls in exploration and production of oil as a result of this year’s low oil prices, coupled with increases in future demand could likely skyrocket oil prices in the future, says the IEA. (How to play world’s hunger for oil).

As stated in the IEA’s World Energy Outlook, “any prolonged investment downturn [in oil exploration and production] threatens to constrain capacity growth, eventually risking a shortfall in supply. This could lead to a renewed surge in prices a few years down the line, when demand is likely to be recovering and become a constraint on global economic growth.”

The oil industry is finding oil harder to come by and they need to drill deeper and deeper to locate oil pockets, which translates into  higher costs. Now that oil is hovering around $80 a barrel and projections put oil above $100 a barrel in the not-so-distant future, oil companies are only just beginning to turn back to exploration and production.

For more information on oil exploration, visit our oil & gas exploration category. For more information on investing with energy using ETFs, sign up for our new special report.

• iShares Dow Jones U.S. Oil & Gas Exploration (NYSEArca: IEO): up 36.3% year-to-date

• SPDR S&P Oil & Gas Exploration & Production (NYSEArca: XOP): up 36.5% year-to-date

• PowerShares Dynamic Oil & Gas Services (NYSEArca: PXJ): up 56.5% year-to-date
  

• United States Oil (NYSEArca: USO): up 21.7% year-to-date

• PowerShares DB Oil (NYSEArca: DBO): up 44.6% year-to-date

Max Chen contributed to this article.

Holdings: The holdings in this fund consist of 60 companies involved in the exploration and production of oil and gas in the United States. Among the top components include: Chesapeake Energy (NYSE: CHK), Occidental Petroleum (NYSE: OXY) and Valero Energy (NYSE: VLO).

Objective
IEO tracks the Dow Jones U.S. Select Oil Exploration & Production Index.

What’s You Should Know

• As an equity-based commodity ETF, it’s a fund that holds companies instead of futures or physical oil. (The four types of commodity ETFs).
• Be aware that the performance of these companies are not always correlated to their underlying commodity.
• Long-term capital gains rate on equity-based ETFs is 15%, but be sure to consult your tax professional for further guidance.
• IEO has a 0.48% expense ratio.

The Latest News

• Global energy demand is rising. If countries limit the long-term concentration of greenhouse gases in the atmosphere to 450 parts per million of carbon-dioxide equivalent, energy demand would grow by 20% in that time frame. (Why futures-based ETFs can lag prices).

There are a  number of factors contributing to the rising price of oil right now:

• 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.

Worldwide energy demand is forecast to rise by about 40% between now and 2030. According to the International Energy Agency, the supply of oil will need to hit 130 million barrels per day by then, up from the 85 million barrels produced per day in 2008.

Polya Lesova for MarketWatch reports that energy demand will be vastly different should countries limit the long-term concentration of greenhouse gases in the atmosphere to 450 parts per million of carbon-dioxide equivalent. If that’s the case, energy demand would grow by 20% in that time frame.

Spencer Swartz for The Wall Street Journal reports that a new global climate deal limiting the carbon emissions could cut oil consumption in years ahead and tap into alternative energy uses. This would cut global crude demand by about 4 million barrels per day. (Why oil’s run may not be over with).

Meanwhile, crude oil is moving as Hurricane Ida weakens and a  stronger dollar reduces the appeal of commodities to investors looking for an inflation hedge. Severe storm damage is not expected and the dollar is up lightly against other major currencies. (Why oil ETFs lag oil prices).

• United States Oil (NYSEArca: USO): up 22.4% year-to-date

• PowerShares DB Oil (NYSEArca: DBO): up 44.4% year-to-date

• iShares Dow Jones U.S. Oil & Gas Exploration (NYSEArca: IEO): up 37.8% year-to-date

For more stories about oil, visit our oil category.

Tony Daltorio for Investment U says that when it comes to coverage of oil prices, it appears that  the only time it really comes up is when the financial media mention either demand destruction in the United States or an inventory buildup of fuel in the United States.

This discounts the demand for oil on a worldwide stage, as China and other emerging markets  have quite an appetite for oil even as demand in the United States stays flat.

The media also has a tendency to ignore the largest part of the supply/demand equation when it comes to oil: The supply of oil is actually dropping three times faster than the demand for it is building. This is a major point that investors would be able to profit from, and make investment decisions based upon this.

How can one play oil with ETFs? There are several options, which range from ETFs that hold the stocks of companies involved in oil production, ETFs that hold a broad range of commodities and ETFs that hold oil futures contracts. Determine your risk tolerance, then take a position only when a fund goes above its 200-day moving average. Have a stop-loss in place to protect yourself on the downside.

ETFs for investors interested in oil:

• United States Oil (NYSEArca: USO): up 12.2% year-to-date

• PowerShares DB Oil (NYSEArca: DBO): up 32.3% year-to-date

• iShares Dow Jones US Oil & Gas Exploration (NYSEArca: IEO): up 33.8% year-to-date

For more stories about oil, visit our oil category.

For a majority of companies, third-quarter results could be below those of 2008, with per-share profits for the S&P 500 at a projected drop of 15.4%. More than 340 businesses could see a year-over-year drop in profits, according to Zacks. Projected revenues show median company sales may drop 7.2%, with more than 360 companies expected to experience a year-over-year drop in earnings.

There are a lucky few that are forecasting actual earnings growth compared to last year:

Homebuilders. First off, conditions were already deteriorating and mortgages were hard to come by last year. Secondly, more new and existing home sales translates to a more stable housing market.

• SPDR S&P Homebuilders (NYSEArca: XHB): up 35.4% year-to-date

Insurance. Insurance companies can potentially pull off double-digit growth. Some firms can bounce back higher from prior-year losses while others may see true growth. Property and causality insurers have been sparred by a calm hurricane season so far, and most insurers benefited from a recovering financial market.

• KBW Insurance (NYSEArca: KIE): up 33.2% year-to-date

Health Care. The medical sector is still raking in the profits. The sector is not correlated to commodity prices and is less economically sensitive. The result is that medical companies are showing both revenues and earnings growth this quarter.

• Vanguard Health Care (NYSEArca: VHT): up 12.7% year-to-date

On the flip side, here are a few sectors that could report contractions:

Commodity. Commodity-related companies reported strong profits last year and as a result, energy and metals companies may show drops in third-quarter profits this year.

• iShares Dow Jones U.S. Oil & Gas Ex Index (NYSEArca: IEO): up 33.8% year-to-date

• PowerShares DB Base Metals (NYSEArca: DBB): up 53.7% year-to-date

Banks. Many banks still remain unprofitable. High joblessness, high level of foreclosures and poor real estate market all affect banks. The result is a projected report of losses for the sector.

• iShares Dow Jones U.S. Financial Sector Index Fund (NYSEArca: IYF): up 20.1% year-to-date

Max Chen contributed to this article.

The stock market cycle typically runs ahead of the economic cycle and in the markets, sectors typically gain ground at uneven paces.  Over this past uptrend, some sectors are performing as one would expect. Others, such as industrials and metals, are surprising investors. Those areas tend to recover in the latter stages, states Mitchell Corwin of Morningstar.

Some investors think that the markets are overextended. If you’re one of them, here are four sectors that Corwin suggests you keep an eye on:

• Exploration and production of oil and natural gas, which can be accessed through the iShares Dow Jones U.S. Oil & Gas Exploration & Production (IEO). It’s up 15.9% year-to-date. A surging economy could propel the fund, but Corwin also feels that demand from growing economies could push oil prices even further.

• Health care, which one can grab exposure to through the iShares S&P Global Healthcare (IXJ). It’s up 4.5% year-to-date. The fund is a portfolio of some of the world’s best health care companies. Pharmaceuticals are a major portion of IXJ.

• Medical equipment manufacturers and producers can be found through the utilization of the iShares Dow Jones U.S. Medical Devices (IHI) which is up 24.3% year-to-date. Demand for medical equipment tends to be steady through economic cycles. There’s also a population here that’s aging, while overseas populations are booming.

• Consumer staples ETFs hold companies which offer goods that are viewed as essential. These companies can be accessed through the Consumer Staples Select Sector SPDR (XLP) which is up 4.5% year-to-date. One caution in this area is that consumers are increasingly shifting to generic brands, which could hurt name-brand staples.

Forecasts and predictions are just that. Always have a strategy before getting into a fund, such as a 200-day moving average strategy. You can read more about the strategy in The ETF Trend Following Playbook, as well.

For more stories on consumer staples, visit our consumer staples category.

Kevin Grewal contributed to this article.

The decline in the price-to-earnings ration is such companies is the biggest of any group in the benchmark index, and it has the companies 23% less expensive than their historical average, Michael Tsang and Lynn Thomasson for Bloomberg report.

Hedge funds are finding it hard to stay away, finding that the opportunity is too good to watch from the sidelines.

Analysts expect that the 29 commodity producers in the S&P 500 will earn an adjusted $10.26 per share in 2010. This 87% increase is substantial and the largest of any S&P 500 industry. A number of factors are at play, but the biggest one is an expected improvement in global demand that could lead to profits for these producers.

Watch the trend lines to see what materializes as the global economy recovers.

• Market Vectors Agribusiness (MOO): up 38.6% year-to-date

• Market Vectors RVE Hard Assets Producers (HAP) up 26.7% year-to-date

• iShares Dow Jones U.S. Oil & Gas Ex Index (IEO): up 21.9% year-to-date

For more stories about commodities, visit our commodiy category.

Many major U.S. oil companies have not been exempt from the effects of the recession, even after posting some of their largest profits during the last boom. The slump in demand for oil and natural gas commodities has earnings reports for heavyweights such as Chevron Corp. (CVX) missing expectations. They posted their lowest quarterly profit in six years, says Angel Ramon for The Wall Street Journal. Texas giant Exxon Mobil Corp. (XOM) recorded its lowest profit since 2003.

Big oil is not disappearing, though. In fact, the industry is moving ahead with in-depth capital projects in the hopes that energy demand will recover as the broader economy does. Jean Scheid for The Examiner reports that there are several things the general public is not aware of when it comes to the oil industry. These facts were noted in an episode of 20/20 with Charles Gibson:

• Americans consume 400 million gallons of oil per day.
• Oil companies do not own gas stations; they do own the stations where large trucks fill up before delivering fuel to gas stations, however.
• All gas is created equal. Chevron, 76, or Arco, it doesn’t matter – gas is gas. This is federally regulated.
• Oil industry regulation has been promised by many presidents, so believe it when you see it.
• As far back as 1978, the U.S. government knew our oil demand was exceeding the supply.
• The average gas station owner only makes a 10-cent profit on fuel sales. To stay in business, they need to sell snacks, sodas and other sundries.

• iShares Dow Jones U.S. Energy (IYE): up 7.2% year-to-date; Chevron, 12.6%; Exxon, 24.6%

For more stories about oil, visit our oil category.

There are reports floating around that the CFTC is preparing to blame speculators for the run-up in energy prices. However, Reuters reports that the CFTC head dismissed the rumors as both “premature” and “inaccurate.” The CFTC is in the midst of three hearings, the first of which took place today.

Britain’s financial regulator today has found no evidence that speculators are behind wild swings in oil prices, report Alistair MacDonald and Carolyn Cui for The Wall Street Journal. Instead, the regulator may attribute it to economic uncertainty.

Some believe that the production of oil, natural gas and coal are going to peak and go into a decline within the next decade. There is nothing that technology can do to save the resources themselves, and production will just continue to wane as we stop using the commodities.

Chris Nelder for Forbes says that “peak oil” is not about running out of oil, it is about reaching the peak rate of production, as we tap out of the resource. As of now, there are no cheaper substitutes snd oil production is expected to go into terminal decline by around 2012. The major oil fields are being depleted, and new discoveries are smaller and of less quality.

Where does that leave us?

Thanks to innovation, the next generation of alternative fuels is in the works. Mark Mills for Forbes says that oil demand will continue to rise as economies recover, but the supply picture isn’t going to change, meaning that we should fasten our seat belts for more potential price volatility.

Mills says anything with a hint of carbon or hydrogen can be reasonably engineered into oil equivalent fuels. As new methods appear, Mills says, it could free up the oil supply where other non-liquid alternative fuels do the trick. His book, The Bottomless Well, deals with the idea of the tech world taking over energy in the pursuit of maintaining our lives as we know them.

• iShares Dow Jones U.S. Oil & Gas ETF (IEO): up 18.2% year-to-date

• United States Gasoline (UGA): up 68.6% year-to-date

• United States Oil (USO): up 9.7% year-to-date

For more stories about oil, visit our oil category.

The oil and gas industry is just behind the drug companies in a fight to stave off the arm of Federal agencies and their new taxes. The industry spent $44.5 million lobbying Congress and federal agencies in the first three months of this year, explains John Porretto for the Associated Press.

From the late 1990s through the first half of this decade, the oil industry spent roughly $50 million to $60 million a year on lobbying and efforts will continues as the Obama administration takes position. Profit margins in the billions have made the industry a target for taxation on exploration and drilling.

Tighter restrictions and higher taxes on drilling and exploration could put a damper on the energy industry sooner than the renewable energy resources are available.

Meanwhile, waning economic optimism is putting the brakes on rising oil prices, which are now trading below $68 a barrel this morning. A strengthening U.S. dollar coupled with a still-struggling global economy is reducing investor demand for commodities. In good news for consumers, gas prices are snapping their 54-day winning streak this morning, falling three tenths of a cent. Analysts don’t think the recent rally can sustain itself for much longer.

• iShares Dow Jones U.S. Oil & Gas Exploration Index (IEO): up 12.8% year-to-date; Occidental Petroleum Company 10.6%; Apache Corp. 7.1%; Devon Energy Corp. 6.9%

• SPDR S&P Oil & Gas Exploration & Production (XOP): up 12.8% year-to-date; Cimarex Energy Company 4.3%; Whiting Petroleum Company 4.3%; Pioneer Natural Resources 4.2%

For more stories on oil, visit our oil category.