Oil ETFs Ride Crude Prices Higher On Supply Concerns

Includes: BNO, UGA, USO
by: Tom Lydon

Oil exchange traded funds are up for the year with crude prices rising above $110 a barrel at one point in February. Gas prices have surged early this year before the summer driving season, and investors are worried about tensions in the Middle East.

The higher energy prices could stifle the economic recovery, says the S&P, but energy traders may capitalize on the momentum through oil-related exchange traded funds.

"We believe the U.S. could slip into another recession if oil prices reach around $150 per barrel for WTI (about $170 for Brent). And if the disruption in the Persian Gulf gets much worse, prices could go as high as $200, in our view," according to a Standard & Poor's research note.

ETF investors may take a look at the U.S. Oil Fund (NYSEARCA:USO) or the U.S. Brent Oil Fund (NYSEARCA:BNO) to gain exposure to either the Western Texas Intermediate crude oil or the North Sea Brent oil prices. Investors in these products need to consider the effect of contango, when later-dated futures contracts are more expensive than near-term contracts, which causes a fund to lose money when rolling futures contracts that are about to mature.

WTI crude was trading around $106-$107 a barrel on Friday.

The higher oil prices translate to lower U.S. economic growth, S&P said.

"We expect that each $10 rise would take about 20 basis points off U.S. GDP growth in each of the first two years of the price hike," the S&P added. "This is a bit less than in the past because cheap natural gas and coal prices now are good substitutes for oil products."

Oil prices, though, have been falling off on slowing Chinese manufacturing data, reports Chris Kahn for the Associated Press. Additionally, Saudi Arabia recently announced that it will increase oil exports to bring down oil prices.

"Strong Chinese growth is the main reason behind rising oil prices the last couple of years," Gene McGillian, a broker and oil analyst at Tradition Energy, said in the article. "As we see slower growth, the thought is that energy demand is going to take a hit."

Additionally, household spending will take a hit as higher energy prices mean higher gas prices at the pump.

"Gasoline, motor fuels and fuel oil account for 5.5% of household spending, and rising. We think a $10 rise in crude oil prices will hike gasoline prices by about 25 cents (8%) and cut consumers' purchasing power by about 0.4%, causing 'staycations' to come back with a vengeance," the analysts said.

U.S. Gasoline Fund (NYSEARCA:UGA) has gained 18.8% so far this year on the heels of rising oil prices.

U.S. Oil Fund

Click to enlarge

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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