Lara Crigger for IndexUniverse caught up with John T. Hyland, chief investment officer and portfolio manager of U.S. Commodity Funds, to talk about the regulatory impact on commodity exchanges, implications of the Saudis’ switch to the Argus Sour Crude Index and the possible move away from U.S.-centric energy ETFs.

Hyland states that the allegations that United States Natural Gas (NYSEArca: UNG) and United States Oil (NYSEArca: USO) caused last year’s extreme volatility in energy prices is unfounded. Critics presumed it was all because of speculators, but it was only opinion. In reality, when oil prices increased, USO’s number of contracts decreased, and vice versa. Investors tended to be net buyers when prices dropped, or the reverse when prices increased. (Natural gas and oil ETFs remain popular).

“Regulators are evolving their thoughts,” says Hyland. If enough regulation persists, investors could move off-exchange and regulators would have to make enough changes to bring back investors.

Saudi Arabia announced its intent to drop the WTI Index in favor of the Argus Sour Crude Index. Hyland sees that the NYMEX and ICE will both contend for the majority of the new index. It is still up in the air which exchange will attract more market makers and traders. U.S. Commodity Funds is still weighing the possible benefits of launching a new ETF based on the index. (Middle East: The next big growth spot?)

The move by the Saudis could also open up the market to additional pricing benchmarks. All that will decide the outcome is the costs associated with the different areas of the world.

Hyland also thinks that ETFs will be become less U.S.-centric and move toward emerging countries, such as China and India. The new ETF products will be assembled and weighed to cater to demand in these other countries.

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.

The U.S. 12 Month Natural Gas Fund (NYSEArca: UNL) has gotten the green light from regulators to issue about 30 million shares, which will purchase natural gas futures for delivery over the next 12 months. Asjylyn Loder for Bloomberg reports that it will sell the near-month contract as it approaches expiration and replace it with a contract for delivery in 12 months.

The ETF comes from U.S. Commodity Funds LLC, which also manages the popular $3.5-billion U.S. Natural Gas Fund (NYSEArca: UNG) and the $1.96-billion U.S. Oil Fund (NYSEArca: USO). (Natural gas ETF shifts strategy).

UNG differs from UNL in that UNG buys the near-month contract, then sells it each month as it nears expiration and buys the next month.

In terms of natural gas prices and futures, what’s the difference between UNG and UNL? UNL can help mitigate some of the impact of contango, which is when the front-month contract is higher priced than the contracts further out. By using the 12-month approach, the impact of contango is, on average, about two-thirds less than it would be in a fund that simply uses a front-month approach.

Which fund an investor chooses depends on what’s trying to be accomplished. When the markets are in contango, it’s no guarantee that a 12-month fund would do better. On the other hand, it could be beneficial for investors  looking to lessen the impact contango can have. On the other hand, if someone is trading frequently and heavily, there might not be as much concern about contango. As the energy markets shift, it could be more advantageous to be in one fund over another – but it’s no guarantee in the volatile energy space. Many have learned that a single hurricane can change conditions rapidly.

Natural gas futures were wavering today. Below-normal temperatures in the Midwest and Northeast are anticipated to boost natural gas demand, but there’s only been modest growth in industrial production, reports Christine Buurma for Dow Jones Newswires. Until today, many traders had been betting that natural gas prices would fall in the coming months.

For more stories about natural gas, visit our natural gas category.

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.

Consumer sentiment fell in the early part of this month to the weakest in three months. Concerns about jobs and income continue to weigh on consumers’ minds, Reuters reports. This could mean restrained spending around the holidays. (How to play retailer’s price wars).

The U.S. trade deficit widened in September by a larger-than-expected 18%, the highest level since January. Imports also jumped by the most in 16 years. The trade deficit’s growth reflected increasing demand for oil and cars amid the economic rebound, reports Bob Willis for Bloomberg.

Oil prices dipped to their lowest point in a month as investors began to pay more close attention to the slump in demand for energy. Although for much of the year many thought demand would resume, consumers and businesses are still using less gasoline than they were a year ago, says Chris Kahn for the Associated Press. United States Oil (NYSEArca: USO) is trading flat this morning.

Europe has officially left its recession. The eurozone economy was largely propelled back to health on the strength of export growth and improving industrial production in Germany, its largest economy. GDP for the 16 countries making up the region expanded by 0.4% in the second quarter, reports Matt Saltmarsh for The New York Times. iShares MSCI Germany (NYSEArca: EWG) is up 1.2% this morning. For more stories about Europe, visit our Europe category.

One of the most well-known commodity ETF providers, U.S. Commodity Funds, especially felt the wrath of the CFTC when two of their commonly traded funds, United States Natural Gas (NYSEArca: UNG) and United States Oil (NYSEArca: USO) came under the microscope.  The primary reason these funds were looked at was concern that the growing popularity of futures-backed commodity ETFs were causing the volatility in oil and gas prices, leading to a huge surge in prices last year, states Max Frumes of Medill Reports. (How to play commodity ETFs).

After overcoming CFTC regulators, the ETF provider has further expanded its offerings by introducing the United States Brent Oil Fund LP, whose prospectus was filed Sept. 18, and the already-approved United States 12 Month Natural Gas Fund LP.

The two new funds offered by U.S. Commodity Funds are the United States Brent Oil Fund LP, whose prospectus was filed Sept. 18, and the already-approved United States 12 Month Natural Gas Fund LP.

The reason behind this expansion is simply that commodity ETFs have enormous appeal:

• ETFs have simplified commodities investing for the average Joe. Now you don’t have to be a financial giant to capitalize on commodity trends.
• As the U.S. economy still continues to show signs of weakness, inflationary concerns loom over investors’ heads. Commodities are one way to hedge rising prices. (Other ways to hedge against inflation).
• The supply vs. demand picture is favorable. Emerging markets continue to develop and prosper. As they continue to do so, demand for commodities will increase. This could potentially lead to higher prices.
• The U.S. dollar is weak right now. This makes commodities priced in dollars cheaper for overseas investors. (Why commodities could go higher).

For more stories on commodities ETFs, visit our commodities category.

Kevin Grewal 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.

In the last month, United States Oil Fund (NYSEArca: USO) has been lagging oil prices slightly: it’s up 10.4% in the last month, compared to about 10.7% for oil prices. PowerShares DB Oil (NYSEArca: DBO) is up about 10.2% in the same time period. (The four types of commodity ETFs).

Contango, when the near-month contracts cost less than the contracts further out, can negatively impact futures-based ETFs because it makes buying new contracts more expensive. This is a situation the oil funds warn of in their prospectuses. The opposite of contango, backwardation, can benefit these funds. The markets spent about half of last year in backwardation.

Since about mid-2008, the oil markets have been in contago. Although they’re still there, the front-month contract is trading about 65 cents below the second month.

United States 12-Month Oil (NYSEArca: USL) can be an option when contango is in play. The fund invests in futures contracts over all 12 months instead of the near-month ones. USL is up 10% in the last month.

For more stories about commodity ETFs, visit our commodity ETF category.

Most recently, crude has soared north of $80/barrel and Lee Loweel of Investment U states that the price could continue to rise as hedge funds that have been sitting on the sidelines for months begin  to find a home in the oil markets. (How crude oil ETFs work).

Additionally, there are plenty of signs indicating that the U.S. economy is finally getting out a recession, emerging and frontier markets are expanding, growing and developing exponentially and the U.S. dollar continues to remain volatile. (How to play a weak dollar).

With this in mind, in addition to some concerns of supply and demand, crude has a few factors supporting that a sustainable price could be be attained. (Factors benefiting oil ETFs). There are several ways to gain exposure to the oil market with ETFs, including through the use of funds that trade futures or hold stocks of oil companies.

For more stories on crude oil, visit our oil category.

• United States Oil Fund (NYSEArca: USO): up 23.3% year-to-date

• SPDR S&P Oil & Gas Exploration & Production (NYSEArca: XOP): up 35.9% year-to-date

Kevin Grewal contributed to this article.

New regulatory actions in the futures-backed commodities market could pose problems for a variety of popular oil ETFs, including the largest one – United States Oil (NYSEArca: USO), writes Don Dion for TheStreet. Other futures-backed oil ETFs that may be affected by position limits include iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (NYSEArca: OIL) and United States 12 Month Oil (NYSEArca: USL). (What does the future hold?).

In the beginning of the year, the CFTC made inquiries about the impact of USO’s impact on the oil market after prices rushed to a record $147.27 in July 2008 before plummeting to near $30 months later. The providers of USO responded by expanding the period in which it rolled its contracts and reducing its position in the underlying benchmark. USO escaped further notice as investor interest turned from oil to other investments, most notably  United States Natural Gas (NYSEArca: UNG).

Recent restructuring of PowerShares DB Commodity Index Tracking (NYSEArca: DBC) portends possible regulatory action that could result in size restrictions on all futures-based oil ETFs. DBC’s managers restructured its oil weightings and also included oil futures contracts traded in London to avoid CFTC restrictions. The managers of UNG have been turning to the over-the-counter swaps markets to get some exposure. We could see more of these types of things as regulations come forward. (What are swaps?)

Assets in long-only commodity ETFs don’t appear to have been dented by the increased regulatory oversight of futures-based funds. At the end of October, assets in the funds stood at nearly $65 billion – a 12% increase from August.

Dion suggests that novice traders steer clear of oil funds until regulatory revisions are set and those who purchase shares should keep the size of the investment in check. Another option to consider for investors leery of futures-based funds are ETFs that hold shares of oil companies. (How to invest in oil using ETFs).

When investing in oil or commodity ETFs, it is important to have a strategy in place. For a more detailed explanation of using a trend following strategy, take a look at The ETF Trend Following Playbook.

For more information on oil, visit our oil category.

Max Chen contributed to this article.