Oil ETFs: 2008 All Over Again?

 |  Includes: DBO, DIG, IEZ, PXJ, SCO, USL, USO, XES
by: Tom Lydon

Fueled by the global recovery and the low interest rate environment, crude oil prices have been able to steadily rise. Those rising prices are hearkening back to another time oil topped $100: 2008.

Crude oil prices recently hit $92 a barrel, a 26-month high, reports Palash R. Ghosh at the International Business Times. Although prices dropped back below $90 on Tuesday, the scuttlebutt is that it’s profit-taking, not a downtrend.

Many investment banks and commodity analysts now have a bullish outlook on oil prices for 2011 as a result of the U.S. economic recovery, loose monetary policy and strong demand from the emerging markets. Goldman Sachs (NYSE:GS) projects oil futures will hit $105 per barrel this year. Morgan Stanley (NYSE:MS) says prices will go over $100. J.P. Morgan (NYSE:JPM) forecasts prices over $100 in the first half and over $120 before 2012. Many analysts also think that the price of oil will continue its 3.7% quarterly growth for 2011.

On the supply side, oil companies will likely increase production if prices hold above $100 or more, and OPEC representative Mohammad Ali Khatibi recently stated that “oil prices increasing to $100 [per barrel] would not hurt the global economy.”

According to Reuters, there are 10 reasons why oil prices will hit a new, high and sustainable level, minus a repeat of 2008’s drastic plunge in prices. Some of those are:

  • Emerging markets such as India and China, along with the United States, and newer technologies are able to add more oil-refining capacity.
  • OECD countries are holding greater crude stockpiles, increasing their forward demand covers.
  • Global demand for oil is expected to jump 1.43 million bpd to a record 87.78 million bpd in 2011.
  • Countries like Venezuela and Russia are engaging in resource nationalism by encouraging greater foreign investment in an effort to boost oil output.
  • Peak oil prices in 2008 have pushed countries to alternative sources of oil, such as deep-water drilling, oil sands and shale oil deposits.

Since the last time oil topped $100 a barrel, there are more options for playing rising prices. The prognosticators say that a rise won’t be accompanied this time by a sharp fall, but you can’t exactly take that to the bank; get positioned for a fall by having an exit strategy. It’s better to have it and not need it than need it and not have it, right?

  • Futures. PowerShares DB Oil (NYSEARCA:DBO), United States Oil (NYSEARCA:USO) and United States 12-Month Oil Fund (NYSEARCA:USL) all track a basket of futures contracts. Before you dive in, though, be sure to understand contango, how it could affect these funds and how their various strategies mitigate it.
  • Equities. If you’d rather not deal with the complexities of futures-based funds, try equity funds that track oil producers, such as iShares Dow Jones U.S. Oil Equipment & Services Index Fund (NYSEARCA:IEZ),PowerShares Dynamic Oil Services (NYSEARCA:PXJ) and SPDR S&P Oil & Gas Equipment & Services (NYSEARCA:XES).
  • Leverage. For the more intrepid of you, there are leveraged and inverse oil funds, such as ProShares Ultra Oil & Gas (NYSEARCA:DIG) and ProShares UltraShort SJ-UBS Crude Oil (NYSEARCA:SCO).

Max Chen contributed to this article.