Oil demand will continue to rise in an expanding global economy. However, oil and energy exchange traded fund investors will have to factor in the changing supply and demand dynamics, along with the occasional geopolitical volatility.
“Supply risks in the Middle East and north Africa, not least in Iraq and Libya, remain extraordinarily high,” according to the International Energy Agency, reports Neil Hume for Financial Times. “Whether in crude of product markets, there is little room for compliance.”
After escalating violence in Iraq heightened supply concerns out of the Middle East, Brent crude touched a nine-month high above $115 per barrel in June. However, prices have since dipped on concerns over diminished demand from refineries in Europe and Asia, and Libyan production is expected to rise as rebels lift a blockade.
The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate futures, has declined 5.7% and the United States Brent Oil Fund (NYSEArca: BNO) has decreased 6.5% off the June 19 high.
If Middle East risks abate, the IEA believes oil will continue to experience improved fundamentals. Specifically, in developing, non-OECD countries, demand will rise an average 48.2 million barrels per day, compared to rich countries where demand will dip to 45.9 million barrels per day.
“Many non-OECD economies are entering a stage of development where rising household incomes and expanding industrial activity typically fuel relatively fast oil consumption growth,” according to an IEA report.
Meanwhile, on the supply side, the IEA calculates that non-OPEC supply growth will average 1.2 million barrels per day next year, or in line with expansions in 2013 and 2014.
Additionally, Goldman Sachs’s head of European energy research Michele della Vigna believes that shale oil will play a significantly larger roll in the oil industry. Specifically, the analyst argues that oil investments and projects that cost more than $80 to $85 per barrel to break even could be delayed or canceled, or about $700 billion worth of capital spending on pipelines may no longer be needed, due to the shale revolution, reports Andrew Peaple for the Wall Street Journal.
Consequently, della Vigna contends the additional shale oil output could meet demand growth in the coming years and potentially weigh on the oil services companies that profit from helping oil companies with large projects. The Market Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK), which tracks unconventional oil shale and oil sands companies, has increased 18.2% year-to-date. Meanwhile, the iShares U.S. Oil Equipment & Services ETF (NYSEArca: IEZ) has gained 17.2% so far this year. [Oil Surges, but Energy ETF Still Attractively Valued]
For more information on the oil industry, visit our energy category.
Max Chen contributed to this article.