OIL Is a Good Way to Play Crude

05/26/2010 12:30 pm EST


Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Doug Fabian, editor of Making Money Alert, has his eye on an ETN he says will be attractive once crude prices stop declining.

The devastating oil spill off of the Louisiana coast has been followed by declining oil prices and increasing questions among investors about the future direction of the commodity.

However, the oil spill does not appear to be nearly as much of a factor in oil prices right now as reduced demand and the strengthening US dollar. While the price of oil currently is sliding, a potential buying opportunity will arise once the commodity starts a sustained recovery.

The investment that I am looking at to take advantage of the inevitable recovery in oil is the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEArca: OIL).

The ETN is designed to provide investors with cost-effective exposure to crude oil, as measured by the S&P GSCI Crude Oil Total Return Index.

[Recently], prices had slipped to $67.90 to hit the lowest point for an oil contract since September 30th. On May 3rd, a barrel of oil sold for $87.15—the highest price in 18 months.

During the past few weeks, prices for WTI—the benchmark US oil contract traded on Nymex—plunged by more than 20% amid investor worries that big government spending cuts and rising government debt will curb economic growth, as well as demand for oil.

A $1-trillion bailout package announced by the European Union and International Monetary Fund has failed to reassure investors and did not prevent the euro from falling to four-year lows. The rising dollar has hurt oil prices, since crude has become more expensive to foreign buyers who do not pay in dollars.

With the current bearish market sentiment, there is no telling how much further oil prices may drop. Demand actually has been aided by increased consumption in faster-growing economies such as China and India. It is possible that US demand could rise in the second half of 2010, if the budding economic recovery gains momentum.

As I look at the future of OIL, there are several reasons for my optimism:

First, the massive BP oil spill in the Gulf already has been factored into the price of oil. It also is likely that efforts to combat the spill will result in at least modest success in the weeks ahead.

Second, energy is a great way to hedge against impending inflation. And, oil is a fine alternative to the most common inflation hedge—gold and other precious metals—which recently hit record levels before pulling back today.

Finally, as we are about to enter the summer months at the end of the Memorial Day weekend, we typically see significantly more driving and, thus, more demand for gasoline. Of course, forecasters expect gasoline prices to ease [by] Memorial Day, so that could keep OIL trading close to its current lows for the year—at least for a while. (It closed below $21 Tuesday—Editor.)

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