Eric Dutram: Persisting worries about Europe’s sovereign debt crisis crippling the continent’s economy, high U.S. crude stocks and worries about China’s growth outlook have been weighing on investor sentiment. The concern has weakened oil prices to a seven-month low of around $90 a barrel.
This unfavorable view has been partly offset by a tightening global supply picture in view of the geopolitical fallout over Iran’s alleged nuclear ambitions and strong demand from developing countries (Commodity ETFs Plunge on Supply Forecast).
As such, crude oil’s near-term fundamentals remain mixed, to say the least. The long-term outlook for oil, however, remains favorable given the commodity’s constrained supply picture.
In particular, while the Western economies exhibit sluggish growth prospects, global oil consumption is expected to get a boost from continued strength in the major emerging powers like India and Brazil that continue to grow at a healthy rate.
According to the Energy Information Administration (EIA), which provides official energy statistics from the U.S. Government, world crude consumption grew by an estimated 0.8 million barrels per day in 2011 to a record-high level of 87.9 million barrels per day (Inside The Forgotten Energy ETFs).
In 2010, oil demand increased by over 2 million barrels per day to 87.1 million barrels per day, which more than made up for the losses of the previous two years, and surpassed the 2007 level of 86.3 million barrels per day (reached prior to the economic downturn).
Global demand of crude oil for 2009 was below the 2008 level, which itself was below the 2007 level – the first time since the early 1980’s of two back-to-back negative growth years (Three ETFs for The Unconventional Oil Revolution).
The agency, in its most recent Short-Term Energy Outlook, said that it expects global oil demand growth of 1.0 million barrels per day in 2012 and 1.2 million barrels per day in 2013. EIA’s latest forecasts assumes that demand will decline in North America and Europe but this will be more than made up by impressive consumption surge coming from China, the Middle East, Central and South America.
Separately, the Organization of the Petroleum Exporting Countries (OPEC) — which supplies around 40% of the world’s crude — predicts that global oil demand would increase by 0.9 million barrels per day annually, reaching 88.7 million barrels a day in 2012 from last year’s 87.8 million barrels a day.
Lastly, the third major energy consultative body, the Paris-based International Energy Agency (IEA), the energy-monitoring body of 28 industrialized countries, said that it expects world oil consumption to grow by 0.8 million barrels per day in 2012 to 90.0 million barrels per day.
In our view, crude oil prices in 2012 are likely to witness more upside rather than downside, given the considerable supply tightness in the market. While domestic demand is relatively soft and the global economy still shows signs of weakness, the fact that demand is outpacing supply appears to be evident.
As long as growth from developing nations continues and the global output is unable to keep up, we are likely to experience a surge in the price of a barrel of oil. With a world population of seven billion people and all the easy oil being already discovered and drilled for, we assume that crude will trade in the $90-$100 per barrel range in the near future as newer supplies of the key commodity become harder to come by.
Thanks to these trends, some investors are looking to push into this oil space (SWM Enters ETF World with Oil Sands ETF (SNDS)). For investors seeking to play this trend in ETF form, the following series of crude oil ETFs could make for interesting picks:
United States Oil Fund (NYSEARCA:USO)
The United States Oil Fund LP is a domestic exchange-traded security designed to track the movements of West Texas Intermediate (WTI) light, sweet crude oil. USO issues units that may be purchased and sold on the NYSE Arca.
The objective of the fund is to track the daily changes in percentage terms of the net asset value of the unit to reflect the daily changes in percentage terms of the spot price of light sweet crude oil.
This is as measured by the changes in price of the futures contract on light sweet crude oil traded on the NYMEX that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it is measured by the futures contract that is the next month contract to expire.
The fund appears to be liquid and trades with the volume of more than 9 million shares a day. USO manages assets under management of $1,264.7 million. The investment is in a portfolio consisting of listed crude oil futures contracts and other oil-related futures and may consist of forwards and swap contracts.
These investments will be collateralized by cash, cash equivalents and U.S. government obligations with remaining maturities of two years or less (Play an Oil Bull with These Three Emerging Market ETFs).
The fund charges an expense ratio of 45 basis points making it a relatively low cost choice in the space.
S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA:OIL)
S&P GSCI Crude Oil Total Return Index ETN has been designed to provide investors with cost effective exposure to crude oil as measured by the S&P GSCI Crude Oil Tot Return Index.
The S&P GSCI Crude Oil Total Return Index reflects the returns that are potentially available through an unleveraged investment in the West Texas Intermediate (WTI) crude oil futures contract plus the Treasury bill rate of interest that could be earned on funds committed to the trading of the underlying contracts.
The fund offers liquidity to investors as over 2 million shares trades in a day. The fund has assets under management of $449.4 million and charges an expense ratio of 75 basis points annually.
PowerShares DB Oil Fund (NYSEARCA:DBO)
The PowerShares DB Oil Fund is based on the DBIQ Optimum Yield Crude Oil Index Excess Return managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on Light Sweet Crude Oil (WTI) and reflects the performance of crude oil (Beyond Corn: Three Commodity ETFs Surging this Summer).
The fund trades with the volume of 81,600 shares a day and has assets under management of $601.3 million. The fund charges an expense ration of 79 basis points suggesting that it could be a relatively high cost product in the space.
PowerShares DB Energy Fund (NYSEARCA:DBE)
The product tracks the DBIQ Optimum Yield Energy Index Excess Return, which is a rules-based benchmark consisting of some of the most heavily traded energy commodities on Earth.
Currently, the basket consists of just five commodities with the vast majority tied up in oil and oil-derivatives. In fact, natural gas accounts for just seven percent of the portfolio while light crude, heating oil, Brent crude, and RBOB Gasoline account for roughly 23% each of the fund. Investors should note that this product is structured as a limited partnership for tax purposes.
Liquidity is low in the ETF with volume of 18,200 shares in a day (Guide to the 25 Most Liquid ETFs).The fund has managed to build an asset base of just $158.1 million, while fees come in at 78 basis points a year.
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