Volatility is nothing new for crude oil prices, which can be swayed by a wide range of factors, ranging from fundamental supply and demand levels to speculative behavior. In a recent memo, the International Energy Agency indicated that global oil demand is expected to rise at a higher rate than previously anticipated over the next year as the economic recovery moves along.

World demand for 2009 is expected to be 84.6 million barrels per day, an increase of 200,000 barrels from the previous forecast but still 1.7 million barrels below 2008 levels. “Things are looking better from an economic perspective,” said David Fyfe of the IEA, an energy adviser to the U.S. and other oil-consuming nations.

Popular interest in energy ETFs is on the rise and an ETF provider has responded by launching a new fund in order to capture the short side of oil.

Oil today is trading above the $67 a barrel mark on a resumption of weakness in the U.S. dollar, reports Ikuko Kurahone for Reuters. Oil prices are going to be closely watched in the coming weeks and months as investors watch for both signs of inflation and a signal as to where the greenback could be headed.

Denver-based United States Commodity Funds has launched another exchange-traded commodity product, its first to offer inverse exposure to commodity prices. The United States Short Oil Fund (DNO) began trading this week on the NYSE Arca Exchange. DNO is the sixth product from United States Commodity funds, joining products offering exposure to crude oil (USO), natural gas (UNG), 12-month oil (USL), gasoline (UGA), and heating oil (UHN).

DNO will seek to track the inverse of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the price of futures contracts on the commoidty. The fund will invest in near month futures contracts, except when the near month contract is within two weeks of expiration, in which case it will invest in the next month’s contract.

By Patrick Watson

The stream of new product launches continued today with United States Short Oil Fund (DNO) on NYSE/Arca. This product’s goal is to deliver a return inverse to that of near-term crude oil futures.

United States Commodity Funds LLC has launched a new exchange-traded fund designed to provide short exposure to the crude oil market.

The United States Short Oil Fund (NYSE: DNO) aims to capture the inverse of the daily return of the front-month West Texas Intermediate crude oil futures contract, as traded on the New York Mercantile Exchange.

PowerShares DB Crude Oil Double Long ETN (DXO) became the first apparent victim of the recent CFTC activity surrounding exchange traded products. Deutsche Bank (DB) announced today (9/1/09 press release) that it will redeem all outstanding shares of DXO after the market close on September 9.

By Murray Coleman

The sponsor of the most popular oil exchange-traded fund is asking regulators for approval to offer a similar fund that shorts light sweet crude prices.

A few recent articles worth reading:

First, is it time to short oil and long natural gas? Bespoke Investment Group suggests in this article that when the current ratio between oil / natural gas is over 18 like it is now, that natural gas outperforms oil. Unfortunately, they do not provide the timeframe of this analysis or charts of the historical data, but if one was interested they could go long a natural gas ETF (UNG) and buy the short oil ETF (SZO). However, I would first suggest doing a little more research on this strategy / ratio since their analysis is nothing more then a teaser.

I think oil has more chances of going down than up from here. My main reasons for oil corrections are the following:

1. Marginal cost of production: In the long run, supply curve is determined by production costs of a marginal supplier. The key feature of the oil supply curve is that for the majority of oil demand, supply can be provided at roughly a $10-20/bbl level (mainly Middle Eastern countries). For Russia, it's probably higher and is in the range of $30-35/bbl. Any extra demand would be met by producers with much higher cost levels of $60-70/bbl. In the first half of 2008, it was assumed that marginal producer would be Canadian oil sands with a $80/bbl cost structure. Speculators were expecting that it would take too long before Canadian oil sands producers start supplying oil to the market and, thus, further production was needed which was expected to come from even more expensive sources (mainly offshore with over $100/bbl cost levels). This assumption clearly did not work out given the drop in global oil demand.
2. In extreme scenarios, oil supply curve turns negative (meaning downward slope) because of OPEC cheating members. With financial markets still half frozen, developing countries have strong incentives to substitute unavailable external borrowings with extra oil supply. Thus, current OPEC discipline cannot be expected to last long.
3. A significant number of oil projects were coming on stream in Q1 2009 and at the same time a lot of refiners were shutting down for maintenance in spring 2009. This should lead to an over-supply situation, the evidence of which is ever growing oil stocks in the US.
4. It's still a deflationary environment and so production costs are expected to continue to fall, bringing down the supply curve.
5. Technically, the oil forward curve (made of futures prices at different settlement dates) still has a steep rising shape which points to future price correction. This steepness was created by unavailable funding to buy oil on the spot market and sell in the future and also by too high storage fees. But it seems that a few banks (including Morgan Stanley) hired tankers and bought oil for storage a couple of months ago and soon this oil will be coming to markets causing further downward pressure.

So, why is oil not at $30/bbl or below? Because the general mood is that the economy is bottoming out, we will soon see recovery and then, due to point one, oil will jump to above $60 levels. Another reason is inflation expectations given the amount of financial stimulus announced around the world (oil as inflation hedge-thesis). I personally disagree with the first point. I also think the second point would be relevant at the end of 2009 or 2010 (US stimulus is comparable to the amount of capital loss of US banks; besides, with banks still not functioning properly, credit is not flowing and money is not created through credit).

By Brad Zigler

Way back in the Pleistocene Era (okay ... it was really just nine months ago), we asked why there weren't more inverse funds on offer for commodity investors ("Where Are The Short Funds?"). Our beef back then specifically focused on oil. Without short oil and distillate exposure available in exchange-traded funds or notes, we groused, there's no securities side alternative for futures crack spreads (examples of which are illustrated in "Energy Spreads Offer Leveraged Profits, Reduced Risk").

The market rebound, whether a joyous celebration of a new year or something that might last awhile, is certainly changing the landscape for stock and bond investors.

As we noted in December, leveraged exchange-traded funds dominated top performers in 2008. (See story here.)

By Brad Zigler

The current oil market – that is, the one born of the September/October short squeeze – has really been a position-player's paradise. Oh, sure, you could have made some money dodging and weaving around the margins of the NYMEX trading rings, but the real money's been made just rolling a plain old vanilla short sale forward. Just ask the owners of the two PowerShares short oil ETNs (NYSE Arca: DTO and NYSE Arca: SZO).

By Brad Zigler

Despite the economic slowdown, there are still some growth businesses. Take manufacturing, for instance. No, not auto or widget making. I'm talking about the manufacturing of exchange-traded portfolios.

Many of our readers at AboutETFs.com enjoyed our earlier article The Complete List of Currency ETFs and have been requesting a similar list for commodities. So, once again, by popular demand, here is our newest list, The Complete List of Commodity ETFs and ETNs, as of October 20, 2008.

COMMODITY BASKETS (All Commodities)

On his column at Forbes.com on July 17, 2008, “Gold And Oil For Soros”, Robert Lenzner says that the legendary investor George Soros, Chairman of Soros Fund Management,“finally shorted oil at $137 a barrel and put on a long position in gold; he expects to see gold hold its ground even if oil continues to decline”.

The reason for this move, according to Lenzner, is his belief in a consistent price ratio of 10-to-1 between gold and oil, and since this ratio fell lately to 7.4, “either gold will rise to 10 times a barrel of oil ($1,350 an ounce) or oil will fall to $96 a barrel--one-tenth the present market price of gold”.

I received an exceptionally interesting e-mail from a reader recently. The writer explained that he was not an investor. In fact, he described himself as a small-scale gambler.

(Hey... why are you writing me, I wondered. I'm not here to offer up strategies for the craps table.)

By Heather Bell

NEW LISTINGS

First Trust Launches First Wind Energy ETF