With Oil ETFs, Equities Beat Futures

October 02, 2015

By now, it's not really news that oil prices are in the dumper. From investors to producers to consumers, everyone is well-aware that oil has come down quite a bit from the lofty levels of recent years.

That said, not a lot of people expect these low prices to last. There is a strong consensus among analysts that oil will rebound significantly in the coming quarters. From a current price around $45/barrel, the median forecast is for WTI crude oil to average $59 in 2016 and $65 in 2017.


All About Supply And Demand

For oil, like any commodity, pricing ultimately comes down to supply and demand. It was surging supply and slowing demand that pushed oil down during the last 15 months. If oil rebounds, it will be a reversal of those trends that sends it back up again.

While nothing is certain, the latest data does seem to suggest that analysts may turn out to be right in their call for higher prices. Both supply and demand are quickly moving in a bullish direction.

According to the International Energy Agency, demand this year may rise by 1.7 million barrels per day, the fastest pace in five years. On the supply side, the IEA expects production from non-OPEC producers to drop by 0.5 million barrels per day in 2016 on the back of tumbling U.S. drilling and output.

Playing The Rebound

In a world where oil demand is growing by more than 1.5 million barrels per day annually, supply must also grow. Ultimately, prices will need to rebound to a level that compels oil companies to invest in new wells and drill again.

What that level is, no one knows for sure. But if we use the analyst consensus as a guide, it's somewhere in the $60s. If oil rises to $65 by 2017, as analysts expect, that would equal a gain of more than 44 percent from current prices.

For investors, the question is, what is the best way to take advantage of a big jump like that in oil prices?


United States Oil Fund (USO)

Unfortunately, there’s no way to precisely capture the increase in spot oil prices. There are no physical oil exchange-traded funds available on the market, and even if there were, transaction and storage costs would significantly reduce the returns for such a fund.

The closest thing investors have to a spot oil ETF are the handful of futures-based ETFs that are out there. The most popular of these is the United States Oil Fund (USO | B-100), with nearly $2.5 billion in assets.

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