Oil Prices Set to Soar in the Second Half of 2010 (USO, OIL)

“Oil prices hit a wall this spring. Rattled investors who worried about the direction of the global economy shunned black gold in favor of real gold as a means of preserving capital. But don’t be fooled. The spring retreat simply set the stage for a second-half rally. After starting the year at about $81 a¬†barrel, prices climbed as high as $86 a barrel before plunging to $64 on May 25. At work in that period was the same shaky market sentiment that wreaked havoc on global equities. Fears that rising debt levels in Europe and other developed economies would lead to another financial meltdown, and that China and other emerging markets would not be able to sustain their high levels of growth robbed oil prices of the momentum they’d built up last year. But even as these fears entrench themselves in the minds of investors, demand for oil didn’t go anywhere. In fact, it’s on the rise.” writes Larry D. Spears, Contributing Writer, Money Morning

Investing in Oil

“For those with a more speculative bent and the proper trading accounts, oil prices can be played directly in the futures markets, targeting either the crude or gasoline futures contracts.

For long-term investors, however, a more comfortable choice would likely be an investment in an oil price linked exchange-traded fund (ETF). Two in particular are worth a look:

United States Oil Fund LP (NYSE: USO) – This fund invests in various exchange-traded futures contracts for crude oil, heating oil, gasoline and other petroleum products, as well as options and forward contracts, seeking to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light sweet crude oil. The fund’s expense ratio of 0.78% is below the average for funds of this type. The fund has $2.15 billion in assets and the 52-week price range has been $30.93 to $42.19.

iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE: OIL) – Actually an ETN (exchange-traded note) rather than an ETF, this fund attempts to track the performance of the Goldman Sachs Crude Oil Return Index, which seeks returns based on the unleveraged investment in WTI crude oil futures traded on the NYMEX. The fund is priced near the bottom of its 52-week range of $20.01-$27.95.

As far as energy companies go, it’s probably wise to avoid those directly involved in the Gulf disaster. That would be British Petroleum, or BP (NYSE: BP), of course, plus Transocean Ltd. (NYSE: RIG), owner of the Deepwater Horizon rig; oilfield service provider Halliburton Co. (NYSE: HAL); Cameron International Corp. (NYSE: CAM), responsible for the faulty blowout preventer; and Anadarko Petroleum Corp. (NYSE: APC), part-owner of the well.

Although these companies lost more than $100 billion in market capitalization since the April 28 explosion – and are probably undervalued as a result – their future liabilities with respect to clean-up costs and damages won’t be clear for months or even years to come. All will also face future operational restrictions as a result of the ongoing investigations and resulting regulatory changes. (If you insist on taking a contrarian stance among this group, Anadarko probably has the least exposure to the spill and the largest array of alternate resources, making it a decent buy at the recent price of around $39 a share.)

The potential restrictions could also pose a risk, or at least a price restraint, for many of the other major oil companies, such as Exxon-Mobil Corp. (NYSE: XOM) and ConocoPhillips (NYSE: COP).

Similarly, President Obama’s new six-month moratorium on additional offshore drilling will weigh heavily on the oil services sector, which has taken a drubbing the past month on weakness in firms like Baker Hughes Inc. (NYSE: BHI) and Schlumberger Ltd. (NYSE: SLB). As evidence of this weakness, the Philadelphia Oil Service Sector index (^OSX) is down 28.3% since its April 23 top.” writes Larry D. Spears, Contributing Writer, Money Morning

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