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High Oil Prices – Turning Lemons Into Lemonade

High Oil Prices – Turning Lemons Into Lemonade

By Simon Maierhofer, Co-Founder
May 7, 2008

 

SAN DIEGO (ETFguide.com) - Oil futures blasted to a new record over $122 a barrel Tuesday. This comes on the heels of forecasts of higher prices and news hinting at supply shortages.

 

Prices at the pump edged lower, but appear poised to rise to new records of their own in coming weeks.

Some analysts feel that the reason behind the soaring oil prices is the dollar’s protracted decline. A falling dollar gives traders reason to buy oil. Investors often buy commodities such as oil as a hedge against inflation when the dollar falls, and a weaker greenback makes oil cheaper to investors overseas.

Goldman Sachs predicts that oil could rise to $150-$200 within the next 24 months. This is partially based on concerns about rising demand and falling oil production from Russia and Mexico combined with possible supply disruptions from Nigeria and Iraq.

Strong demand from China, India, Russia, Brazil and in the Middle East is expected to grow by about 1.2 million barrels a day this year (total oil production is approx. 83 million barrels/day).

Fortunately, ETFs have made it easier to offset the higher cost at the pump, heating oil and gas with profits from oil ETFs.

The iPath GSCI Crude Oil ETN (Ticker: OIL), PowerShares DB Oil Fund (Ticker: DBO) and the United States Oil Fund (Ticker: USO) are all up right around 30% YTD.

Below is a list of ETFs that are directly linked to the price of oil.

Oil Commodity ETFs:

Name

Ticker

Exp.

Holdings

iPath GSCI Crude Oil

OIL

0.75%

100% Oil (sweet, light, crude)

PowerShares DB Oil Fund

DBO

0.50%

100% Oil (sweet, light, crude)

United States Oil Fund

USO

0.50%

100% Oil (sweet, light, crude)

Unites States 12-Month Oil Fund

USL

0.60%

100% Oil (12 futures contracts)

United States Gasoline Fund

UGA

0.60%

100% Gasoline

United States Heating Oil Fund

UHN

0.60%

100% Heating Oil

ELEMENTS Rogers Int. Energy

RJN

0.75%

47% Crude Oil, 31% Brent Oil, 7% Gasoline

PowerShares DB Energy Fund

DBE

0.50%

22.5% each: Brent Crude, Light Crude, Heating Oil, Gasoline, 10% Natural Gas

iPath DJ-AIG Energy ETN

JJE

0.75%

41% Natural Gas, 37% Crude Oil, 11% Heating Oil, 10% Gasoline

 Broad commodity ETFs with exposure to oil:

Name

Ticker

Exp.

Holdings

iPath S&P GSCI Total Return

GSP

0.75%

53% Oil, 7% Gas. 5% Heating Oil, 5% Gasoline

iShares S&P GSCI Commodity

GSG

0.75%

53% Oil, 7% Gas. 5% Heating Oil, 5% Gasoline

PowerShares DB Commodity

DBC

0.75%

Oil 35%, Heating Oil 20%

iPath DJ-AIG Commodity

DJP

0.75%

13% Oil, 12% Gas, 3% Heating Oil

All the above mentioned ETFs are directly linked to the actual price of oil. Ultimately performance will depend on the allocated exposure to oil, natural gas, gasoline, heating oil (and other commodities with the broad commodity ETFs).

Another option to invest in the oil or energy sector is via sector ETFs. Those are ETFs that hold stocks of companies in the oil sector. Sector ETFs can offer exposure to the broad sector or a sub-sector such as oil exploration or oil equipment.

The next article will shine the spotlight on energy sector ETFs.

On the other hand, we will address how to cash in on falling oil prices. After all, with so much talk about oil breaking the $150-$200/barrel mark, the contrarian investor is thinking “go short”!

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