Crude Stockpiles Drive Oil Spike and Investor Interest

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 |  Includes: BP, DBO, OIL, RDS.A, USL, USO, XOM
by: World Market Pulse

World oil prices dipped from overnight gains as oil prices slipped from a five-month high on Wednesday after an American Petroleum Institute (API) report showed US. crude stockpiles jumped more than forecast last week indicating that oversupply may still persist despite central bank efforts to shore up economies.

There is no doubt that the future of oil prices and related exchange traded funds is based on the basic fundamentals of demand and supply and with high stockpiles translating into sluggish demand, there has been a restraining influence on prices. The price of oil were slowly starting to creep up but with the stockpile report comes an interesting spike that can give investors and traders an opportunity to play the markets and a good wealth creating opportunity if they time it right.

Front-month US crude on Monday touched $82.99 a barrel, the highest price since early May, after the Bank of Japan cut interest rates, bolstering hopes that the US Federal Reserve will early next month announce a second round of so-called quantitative easing measures to boost growth.

Earlier, oil prices had hit a five-month peak near $83 a barrel, boosted by a slumping dollar after a BoJ rate cut and by tanker disruptions after a French strike and a closed Texan shipping route. November crude rose 1.42 percent to $82.63 per barrel, the highest settlement since closing at $86.19 on May 3rd.

Crude oil prices are not only highly sensitive to global political and economic developments but also the US dollar as most of the worldwide oil sales are denominated in dollars. Usually when the dollar’s value declines as against the euro, effective costs in dollars increases and so does the pricing of the crude. The dollar meanwhile reached its lowest level against the euro since February as speculation grows on an impending intervention by the US Federal Reserve to boost the ailing economy.

Apart from the oil price spikes, there has been a lot of Merger And Acquisition activity in the oil segment with Companies including Exxon Mobil Corp. (NYSE:XOM) , BP Plc (NYSE:BP) and Royal Dutch Shell Plc (NYSE:RDS.A) snapping up reserves of unconventional gas, an industry term for fuel trapped in shale formations, coal beds and impermeable sandstone rock. The companies are betting prices for the cleaner-burning fuel will rise as governments curb carbon dioxide emissions and as more accessible sources dwindle.

Oil Global Outlook:

According to the Oil Market Report released in September 2010 by The International Energy Agency (IEA), Global oil demand is projected to average 86.6 mb/d in 2010 and 87.9 mb/d in 2011. 2010 readings were revised marginally higher based on stronger data from OECD (Organization for Economic Co-operation and Development) countries. The report also projects global oil demand to grow by more than 25% in the coming 20 years:

For the short-term, investors are better off keeping an eye on market trends, geopolitical risk, credit issues while for the long-term, investors would consider the correlation with overall global growth and economic recovery, improved industrialization and growing oil demand from India and China.

Oil ETFs

United States Oil Fund (NYSEARCA:USO): The investment objective of USO is for changes in percentage terms of the units' net asset value to reflect the changes in percentage terms of the spot price of light, sweet crude oil, as measured by the changes in price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange that is the near month contract to expire, less USO's expenses.

Expense Ratio: 0.80%

United States 12 Month Oil (NYSEARCA:USL): The investment objective of USL is to have the changes in percentage terms of the units' net asset value reflect the changes in percentage terms of the price of light, sweet crude oil, as measured by the changes in the average of the prices of 12 futures contracts on crude oil traded on the New York Mercantile Exchange

Expense Ratio: 0.86%

PowerShares DB Oil Fund (NYSEARCA:DBO): The Index is a rules-based index composed of futures contracts on Light Sweet Crude Oil (WTI) and is intended to reflect the performance of crude oil. You can't invest directly in an index.

Expense Ratio: 0.50%

The iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA:OIL): The index reflects the returns that are potentially available through an unleveraged investment in the West Texas Intermediate (WTI) crude oil futures contract plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts.

Expense Ratio: 0.75%

Disclosure: No positions