Commodity Trading Trends: Is Crude Oil Cheap?

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Includes: CVX, USO, XOM
by: Jared Cummans

The past few weeks have seen oil enjoy a meteoric rise. The fossil fuel surged from roughly $75/barrel, all the way to $102/barrel in a recent peak. But breaking the triple digit barrier didn’t last long for crude, as global instability and a lack of investor confidence moved in to create pressures for the commodity yet again. The past few trading days have been miserable for oil, as it is now fighting with prices in the low $90s. Given the recent strength exhibited by WTI, the commodity’s low prices now present themselves as an interesting play. By many accounts, crude was undervalued even when it was above $100 and the coming year may send prices even higher, making recent lows an enticing opportunity for oil [see also 12 High-Yielding Commodities For 2012].

This year saw prices jump as high as $114/barrel amid uncertainty in the Middle East among other factors. The stage is set for 2012 to experience similar problems, only this time it seems that the issues will stem from Iran, a much more significant force in the crude industry. Aside from the political issues in one of the world’s largest producers, emerging market demand and tight supplies are also major factors that will come into play for 2012. With oil taking a hit the past week, now might be a great time to buy in before the energy source makes another surge. Note that no matter where crude is headed, it will certainly be a bumpy road getting there. The commodity is heavily correlated to major equities and is known for its volatile daily movements.

Ways To Play

For investors who have a strong opinion on where crude is headed, or for traders looking to make a quick return, there are a wealth of options available. Perhaps the most direct method comes from the February crude oil futures contract offered on the NYMEX. But not everyone is savvy to futures markets as they can be quite complex and difficult to understand. Investors can also utilize the United States Oil Fund (NYSEARCA:USO), an ETF that tracks the very futures contracts offered on the NYMEX. The fund has about $1.5 billion in assets and trades an average of 12.7 million times each day. Finally, for those looking for a more indirect play, stocks like ExxonMobil (NYSE:XOM) or Chevron (NYSE:CVX) also make for interesting opportunities [see also 25 Ways To Invest In Crude Oil].

Disclosure: No positions at time of writing.

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