Long-Term Energy Plays for Short-Term Traders

03/12/2010 12:01 am EST


As the global population continues to expand and purchasing power in developing nations increases, the world’s appetite for energy is likely to amplify, painting an opportunity for investors.

According to the Energy Information Administration (EIA), average consumption of crude oil is expected to increase to 1.5 million barrels per day, up nearly 300,000 barrels per day from its previous forecast of 1.2 million barrels per day.  This uptick in demand is primarily being driven by expected economic growth in the Asia-Pacific regions and the Middle East, as well as a more optimistic domestic economic outlook.

Additionally, the EIA has stated that it expects the average price of a barrel of crude oil to average a price well north of $80 per barrel, which is being supported by an increase in demand and the decision by OPEC to curtail any increases in production. These price pressures have further lead the EIA to forecast the average price of a gallon of gasoline in the US to hover around $2.35 per gallon for 2010, an increase of nearly 21% from a year earlier.

With this in mind, there are plenty of ways investors can cash in on the energy sector. Here are a few:

· The US Oil Fund (USO), which holds futures contracts and rolls them forward on a monthly basis. One thing to keep in mind when investing in USO is that contango and backwardation can have significant impacts on its performance.

· The iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (OIL), which is an unsecured, unsubordinated debt security interest linked to the performance of the Goldman Sachs Crude Oil Return Index. OIL seeks to track futures contracts in west Texas intermediate (WTI) crude oil.

· The United States Gasoline Fund (UGA), which seeks to replicate changes—in percentage terms—of the price of gasoline. UGA invests in the futures contract of unleaded gasoline and is subject to the influences of contango and backwardation, similar to that of USO.

· The Energy Select Sector SPDR (XLE), which gives exposure to major integrated oil and gas companies like Exxon Mobil (XOM) and Chevron (CVX).

· The iShares Dow Jones US Oil & Gas Exploration Index (IEO), which primarily holds companies that are focused in the exploration, production, and development of oil and natural gas. Some of its top holdings include Occidental Petroleum (OXY), Apache Corporation (APA), and Devon Energy (DVN).

·  The iShares S&P Global Energy (IXC), which gives global exposure to the energy sector and includes such companies as Royal Dutch Shell (RDS.A), BP Plc (BP), and Petroleo Brasileiro (PBR).

Although an opportunity seems to exist in the sector, it is equally important to consider the volatility and inherent risks involved in investing in a commodity-driven sector. To help mitigate these risks, the implementation of an exit strategy that triggers price points at which an upward trend could potentially be coming to an end is of importance.

According to the latest data at SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: USO at $38.41; OIL at $24.33; UGA at $35.06; XLE at $56.78; IEO at $53.94; IXC at $34.41.  These price points change on a daily basis as market conditions fluctuate.

By Kevin Grewel at SmartStops.net

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