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.

The “peak oil theory” states that the world will be in need of new energy sources within the next decade or so, but what does this mean for oil ETFs?

MoneyEnergy has some startling facts about oil:

• U.S. oil production peaked at 10 million barrels a day…way back in 1971
• The discovery of new oil fields (that’s worldwide) hit its peak in 1966
• World oil production has barely grown since 2005
• Oil prices hit a record high in 2008, even though Americans had driven 15 billion miles less than a year earlier

Oil is a limited resource and is only going to become more scarce and more expensive in the future, which could wind up being to the benefit of oil-focused ETFs. It could also be to the benefit of the alternative energy industry as Americans look for new sources to power their industries.

In some areas, the situation is even more dire. Saudi Arabia is not only running out of oil – it’s running out of water, too. MoneyEnergy reports that the country has a few plans:

• Invest in the agricultural sectors of Thailand, Pakistan and Sudan to secure its future food supply
• Use their  oil fields to turn salt water into drinking water through desalination; however, this method is questionable, since it burns tons of oil in the process

There is no escaping the impact of declining resources whether you are in Saudi Arabia or the United States.

• United States Oil (USO): up 8.9% year-to-date



• United States 12 Month Oil (USL): up 26% year-to-date



• PowerShares DB Oil (DBO): up 33.2% year-to-date

For more stories about oil, visit our oil category.

Trading oil futures is not like trading stocks or bonds, and generally requires experience and expertise.  Ari J. Officer of Time Magazine outlines three things that are needed to be an oil speculator:

• You need money. The New York Mercantile Exchange requires a minimum of $10,000 in a margin account as collateral, unless one is a member of the exchange.  Why this magic number? Aa single contract of crude holds 1,000 barrels, so a $10 price movement can either add or subtract $10,000 from one’s account.

• You need to find a broker and clearinghouse to connect you with the markets to trade, as well as to act as insurance to the exchange that you will cover anything you lose.

• You need a monitor that operates 24/7 to track the oil markets.  Keep in mind, that you’re not trading the physical oil, you’re trading a contract obligation to either buy or sell it at a specified delivery date in the future.

Boy, oh, boy. It should be apparent by now that ETFs simplify this process a great deal. There’s no need for minimums, monitors and it’s far cheaper to access the oil market via an ETF. It’s so simple, in fact, that it’s what has led the Commodity Futures Trading Commission (CFTC) to consider regulations and limitations in order to prevent speculators from driving prices up and down.

The providers of these funds have spoken out in defense of them, saying that the claims that they were driving prices “self-serving statistical gibberish.” United States Commodity Funds Chief Investment Officer John Hyland says that such caps imposed by the government would ultimately lower the liquidity his funds deliver to the futures markets, because the existing funds would need to be broken off into smaller funds.

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

• United States 12 Month Oil (USL): up 27.1% year-to-date

• PowerShares DB Oil Fund (DBO): up 34.4% year-to-date

For more stories on oil, visit our oil category.

Kevin Grewal contributed to this article.

The Labor Department report indicated that company cutbacks have depressed consumer spending, which helped send crude prices down to $69.45 for September deliveries, reports Dirk Lammers for The Associated Press.

The Energy Information Administration predicts U.S. consumption of liquid fuels will drop 4.1% this year. OPEC expects demand to diminish by 1.65 million barrels per day year-over-year, then begin to rise again in 2010. The ailing dollar has also helped bring down the price of crude, which is priced in dollars.

OPEC is concerned with the increased production of oil by its member countries, reports Spencer Swartz for The Wall Street Journal. Overall production quotas rose 105,000 barrels a day last month. Since April, output increased 420,000 barrels a day, almost 2%.

Iraq, currently the only member not restricted by production quotas, is pumping out as much oil as it can manage as it tries to rebuild from the war.

The Natural Resource Defense Council released a report ranking states by vulnerability to changing oil prices and steps those states have taken to reduce oil dependence, writes Matt Coker for OC Weekly.

The top 10 states in promoting clean tech and reducing oil dependency in descending order include: California, Massachusetts, Washington, New Mexico, Connecticut, New York, New Jersey, Pennsylvania, Oregon and Florida. The top 10 states vulnerable to oil prices in descending order are: Mississippi, Montana, South Carolina, Oklahoma, Louisiana, Kentucky, Texas, New Mexico, Georgia and Arkansas.

• United States 12 Month Oil (USL): up 28% year-to-date

• United States Oil (USO): up 11.4% year-to-date

For more information on oil, visit our oil category.

Max Chen contributed to this article.

United States Commodity Funds

If the Securities and Exchange Commission (SEC) grants approval, it will be the provider’s second 12-month commodity fund. The first, United States 12 Month Oil Fund (USL), targets oil. Index Universe reports that the 12-month natural gas commodity fund invests in futures contracts that promise delivery of natural gas to Louisiana’s Henry Hub.

Both USL and the natural gas fund generally will hold a complete basket of the next 12 months’ futures contracts. United States Natural Gas (UNG) works differently; it simply holds the front month contract — August 2009 at the moment.

The purpose of a 12-month strategy will help protect futures investors from the problem of contango, which is when the cost of a near-month contract is cheaper than a far-month contract. Two weeks before the expiration of the nearest-month contract, the fund will roll forward another month, picking up the then-12-months-out contract.

The introduction of such a fund can also be considered in lockstep with the trend toward green or renewable energy. Natural gas will be around plentifully for the foreseeable future. New technologies, from drilling equipment to computer visualization that assists in exploring potential fields, are allowing developers to tap new fields.

Natural gas could help bridge the gap between regulations requiring the reduction of carbon emissions into the atmosphere and plentiful, reliable non carbon-based energy sources. The gas can be used for heat, energy and to power cars and trucks as well, reports Larisa Brass for Knoxville biz.

• United States Natural Gas (UNG): down 41.8% year-to-date

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

The last GDP report showed a 6.1% shrinkage; the first reading was 5.5%. The second quarter reports are expected by most economists to show some easing of the decline.

Consumer sentiment has reached levels not seen in eight months, a report today showed. In November, the report hit a 28-year low, but the 68.7 reading was higher than the 68.0 economists had expected, Reuters reports.

• Consumer Discretionary Select Sector SPDR (XLY): up 6% year-to-date

The deadline for a restructuring of General Motors (GM) is nigh, and shares have fallen below $1 for the first time since 1933. An Obama administration official says that GM could be under bankruptcy protection for 60 to 90 days. If GM does file for Chapter 11, it would leave existing shareholders virtually wiped out, says Reuters.

Oil is continuing its upward mobility, today reaching six-month highs that some fear could tamp down the “green shoots,” Aaron Task for the Tech Ticker reports. Prices are now around $66 a barrel. If this continues, many wonder if it’s going to send consumer confidence right back where it was late last year. But on the positive side, Obama has been working to get new fuel economy mandates instead of waiting until oil tops $100 a barrel again.

• United States 12 Month Oil (USL): up 15.6% year-to-date

• iShares FTSE NAREIT Real Estate 50 (FTY): down 11% year-to-date

The gap between U.S. imports and exports grew for the first time in eight months in March, primarily because exports declined, report Jack Healy and Bettina Wassener for The New York Times. On the upside, economists say that the declines in the value of trade between the United States and the rest of the world seem to be plateauing.

For the first time in six months, oil has hit $60 a barrel, Reuters reports. One analyst says that oil is simply riding the coattails of the bounce in equities for now and ignoring the inventory build-up.

• United States 12 Month Oil (USL): up 10.1% year-to-date

What’s Behind the Jump? The energy analysts attribute the jump in inflows to a spike in oil prices seen in the last few weeks, plus a cold snap across the United States, storage demand and a jump in refining margins, says Izabella Kaminska for the Alphaville blog at The Financial Times.

In the near-term, though, the analysts expect the price spike to be fleeting and they don’t believe it signals any kind of end to a bear market.

Massive Pullout? Goldman believes that investors are pouring into oil funds while thinking that the commodity was cheap. If a large spike in prices isn’t seen soon, they believe that this will cause investors to pull out of the funds on a sweeping scale. The number of barrels currently owned by investors is only 13% down from the number owned at the top of the market in July 2008.

Who Are the Investors? Goldman also feels that the type of oil investor has changed, and that most inflows are now coming from the retail and private banking sectors, which tend to be more focused on oil prices (as opposed to the institutional investor, which focuses more on the curve shape and implied carry of the position).

Contango Defined. Oil prices are currently in a “negative roll” state, or contango. In contango, the futures price is above the expected future spot price. As a consequence, the price will decline to the spot price before the delivery date.

Oil Consumption. ETF provider PowerShares hosted a webcast yesterday with BP Capital Management Founder and Chairman T. Boone Pickens, who had some interesting points to make about the commodity:

• Since 1970, our dependence on imported oil has shot up from 24% to nearly 70%
• The world oil consumption on a daily basis is 85 million barrels; 21 million of that is the United States (but we’re only 4% of the world’s population)
• The United States has other resources at its disposal – particularly, wind

If we don’t change our habits soon, the price spikes in oil that we’ve witnessed in the past will almost certainly return to haunt us.

Spotty Forecasts. Paul Amery over at Index Universe wonders if the question of whether oil ETF investors know what they’re doing is a fair one to ask. He notes that Goldman’s oil forecasting skills haven’t been spot on lately – the predicted $200 a barrel last May. However, they also called $100 a barrel a few years ago, so make of that what you will.

Amery also notes that exchange traded product investors were gathering short oil positions just ahead of the peak; now they’re switching back to buying.

Investors Are Smart. We have to agree with Amery – today’s investors are smart, educated and careful in their research. Thanks to the internet, the transparency of ETFs and the overall accessibility of necessary information, the majority of investors are arming themselves with knowledge before getting into the markets.

The best way to protect yourself is with both an entry and an exit strategy. Have it ready at all times.

• United States 12 Month Oil (USL): down 4.9% year-to-date, up 0.3% in the last month. This fund approaches futures by buying the near-month contract and rolling it over into the next month as each contract expires. Investments are spread out over 12 months of contracts, bought in equal amounts.

Hundreds of companies will be releasing their numbers for the third-quarter and in some cases, they will be making fourth-quarter forecasts, says Tim Paradis for the Associated Press.

Wachovia (WB) reported that its profit fell 28% and that it will cut 10% of its workforce. But banks aren’t the only sector getting smacked – Boeing’s (B) earnings fell 38% as a strike stopped production of commercial jets. The company already has a backlog of orders.

Tech companies have been hit hard on a drop in consumer and business spending, reports Martin Crutsinger for the Associated Press.

Treasury Secretary Henry Paulson said that it will take awhile for the eocnomy to stage a true turnaround, even with the steps the government has already taken.

Oil prices keep sliding this morning on reports of huge stockpiles in both crude and gasoline, according to the Associated Press. Mid-morning, oil is down to $68.25 a barrel.

United States 12 Month Oil (USL) is down 17.6% year-to-date.

After falling 380 points at the open, the Dow Jones Industrial Average closed more than 400 points higher. This was in defiance of several negative economic reports, including a slump in factory orders and depressed homebuilder sentiment, reports Peter A. McKay for the Wall Street Journal.

One of the few positive reports was that the Consumer Price Index remained flat for September, signalling that inflation is being held in check.

The S&P 500 saw its worst percentage drop since the 1987 crash on Wednesday, but was up 4.3% today. The health care and technology were particularly strong, gaining 5% each.

Investors are still skittish, though. The Volatility Index (VIX) once again touched new records, this time soaring to an intraday high of 80. The index measures the prices of options contracts to gauge the nervousness of investors. It closed at 67.1, which is still historically very high.

Oil prices continued their descent, closing at a 14-month low of $69.85 a barrel. The price is less than half of the record high it reached in July, reports Stevenson Jacobs for the Associated Press. Gas fell another 4 cents to a national average of $3.08 a gallon.

OPEC announced that it was moving an emergency meeting up by almost a month to discuss the rapid drop in prices, but traders ignored the news. The meeting will take place on Oct. 24.

• United States Oil (USO), down 22.1% year-to-date (black line)
• United States 12-Month Oil (USL), down 14% year-to-date (green line)