Oil & Gas ETFs

| November 21, 2008

I was driving into the office earlier this week.  It was like any other Monday.  Stop and go traffic was grating on my nerves.  I’d already emptied my to-go mug of coffee.  The only thing on the radio was blather.  To say the least, it was the start of another workweek.

Then the news report came on…

I couldn’t believe what I was hearing.  Somewhere in south Phoenix gas was now selling for $1.99 a gallon.  Not just at one station, but at three stations all at the same intersection.

The news room must have been having a slow day.

Since when does $1.99 gas become the lead story?

I guess everyone’s still concerned about gas prices.  It’s hard to forget paying $4.00 a gallon over the summer.  High oil and gas prices are a struggle for most Americans.  This summer it became obvious.  With gas prices skyrocketing Americans drove less, bought less, and generally had a sour outlook on the economy.

As a matter of fact, high oil prices became a global concern.  Companies started adding fuel surcharges to deliveries.  Airlines were on the verge of going bankrupt.  The cost of everyday items was marching higher. Inflation had gripped a hold of the global economy.

It was so bad, that the European Central bank actually raised rates earlier this year to combat inflation.  This move came in spite of the noticeable decline in economic activity (which should have prompted a rate cut).

Are these low gas prices going to last?

NO.  I don’t think they will and here’s why.  OPEC wants more money per barrel of oil – not less.  Remember who OPEC is?  They’re the Organization of Petroleum Exporting Countries.  It’s a big consortium of countries with big oil reserves.  They meet and decide what price they want to get for their oil.

To increase prices they simply produce less.  If they want to lower prices, they’ll just turn on the taps.  Funny thing was with oil peaking at over $140 a barrel, OPEC wasn’t so excited to bring prices down.  They accused the US and other western countries of consuming too much oil.

They said if we wanted to lower prices we should consume less.

Now they’re getting their wish.  Oil consumption is falling rapidly.  Of course, OPEC reacted as expected.  As soon as oil dropped below $100 a barrel they quickly gathered to discuss the situation.  On October 24, in Vienna, Austria OPEC made a decision.  They cut oil production by 1.5 million barrels of oil per day.

They wanted the price higher, not lower.  With the US teetering on a recession, they were focused on making more money.  Never mind the price of oil was up almost 400% from just a few years ago.

So how have oil prices responded?

They haven’t.  Oil is still sliding lower, which tells me a few important things.  First, the downward slide in oil isn’t about to change direction any time soon.  We’ll head lower… maybe by as much as 50%.  OPEC could cut production again in an effort to prop up oil prices.  But it won’t work in the short term.

The longer term trend in oil is clearly up.

Once the economy starts turning, the prospect of higher US oil consumption will drive prices higher.  We’ll start to see increased demand and constricted supply.  Oil will start moving higher again.  Then the domino effect will take place.  With the US on a rebound, Europe and Asia will see their economies improve.  China and India will start growing more rapidly, and the oil squeeze will return.

We’ll first watch oil fall to $40 a barrel or lower.  Then with better economies, we’ll see prices shoot up to the $70s.

I might be wrong… but I think this scenario is very probable.

If you’re interested in playing fluctuations in the commodities space, the easiest way is with ETFs tracking the specific markets.  Right now, to profit from oil’s price falling you might look at UltraShort Oil & Gas ProShares (DUG) ETF.  Once oil moves higher you might look at the PowerShares DB Oil (DBO) ETF.  If you time your entries and exits just right some serious profits can be made.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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