Oil production in America is booming, especially after the discovery of shale oil in regions of North Dakota and Texas. The development of these resources is now beginning to have a huge impact on the global hydrocarbon markets, as evidenced by a report from the Energy Information Association (EIA) which states that, last month, shale oil production had reached 7.4 million barrels per day.
Further, an estimate by the International Energy Agency (:IEA) projects that the world’s largest economy will achieve shale oil production of 9 million barrels a day by 2018. In fact, some believe that the country will surpass Saudi Arabia in oil production by 2020, underscoring America’s dramatic rise up the oil charts (see Crude Oil ETF Investing 101).
Troubled times for investors
Oil has proven to be a haven for investors in the commodity space; moreover oil prices are constantly tracked and monitored as they are considered to be a key economic indicator. In spite of good news from the American oil production industry, oil prices have remained volatile and have worried investors lately.
The political turmoil in Egypt and sluggish data from China has been instrumental in keeping oil prices highly volatile and range-bound. The increase in cost of oil extraction and a strong dollar have restrained the commodity to break out of the low $100/bbl. level. Added to this is a general commodity aversion that has also kept a lid on prices for this natural resource (read 4 Ways to Short Oil with ETFs).
Possible bets for investors
The recent resilience in the oil and gas sector has left investors highly confused about how to play oil. Those who seek to play in this challenging commodity may look at the available options which could be solid picks if the commodity breaks out higher:
United States Oil Fund (AMEX: USO)
Launched in April 2006, USO seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate light, sweet crude oil and is a popular choice amongst investors. The fund has a good asset base of $1.46 billion and charges 45 bps in fees.
Moreover, the ETF trades in a daily average volume of 4.7 millions shares a day. Over a one-year period, the fund has yielded decent returns of 7.3% as of Jun 30. The fund is ideal for investors who wish to play short in this space.
iPath S&P GSCI Crude Oil Total Return Index (AMEX: OIL)
Launched in Aug 2006, OIL is designed to provide exposure to the S&P GSCI Crude Oil Total Return Index. The fund has an asset base of $314.7 million, though the ETF is a bit expensive as it charges 75bps in fees and expenses (see 3 ETFs for the Unconventional Oil Revolution).
The ETF has a daily average trading volume of 800,000 shares. The fund has given returns of 8.13% as of Jun 30, for the trailing one-year period.
United States Brent Oil Fund (AMEX: BNO)
Launched in June 2010, BNO is designed to track the movement of Brent crude oil. The fund is not very popular, as reflected in its asset base of $41.3 million, and trades in a low volume of 58,000 shares a day.
The ETF has given returns of 12.2% over a one-year period as of June 30. The fund is illiquid denoted by its wide spread.
Is oil a gamble?
While oil futures are seen to be in a stage of normal backwardation, the current market scenario has completely changed. Analysts see the commodity in the contango stage in the short run mainly due to rising costs associated with the commodity.
Analysts are also of the opinion that under normal circumstances, future oil prices may trade well above $106/bbl. Some may also suggest going short on November 2013 futures contract and to go long on the December 2015 futures contract, at least when looking at the curve (see Crude Oil ETF Investing 101).
Oil prices have been trading mostly in the range of $80–$100 over the past one year. Though the year started on a strong note for the commodity, the latter half of the year is expected to see more bullish trends.
Globally oil prices may be trending on the higher edge now, but the outlook for oil in the near term isn’t that great, especially when prices remain highly volatile and oil production ramping up. Seeing the current market sentiment, one may choose to go short in this interesting space.
Still, the trend could be your friend in this corner of the market, especailly if supply is reduced thanks to Egyptian woes or other geopolitical factors. Plus, the curve is arguably favoring some bulls for the time being, so a look to any of the aforementioned ETFs could be ideal for this important commodity.
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