Investing in Oil with ETFs

Investment case for Oil ETFs

Highlights from the Energy Information Agency's Short Term Outlook - June 10, 2008

Price

•  Oil prices were on a rollercoaster ride upwards over the last month, increasing from $113 to $133 per barrel over the first 3 weeks on May, then falling back to $122 on June 4 before surging to over $138 by June 6.

•  Supply uncertainties in several oil exporting regions, coupled with healthy demand growth in the emerging market countries, continued to pressure oil markets.

•  The overall picture of strong demand and tight supply is expected to continue.  WTI prices, which averaged $72 per barrel in 2007, are projected to average $122 per barrel in 2008 and $126 per barrel in 2009.

Consumption

•  World oil consumption is projected to grow by 1 million barrels per day (bbl/d) in 2008.

•  U.S. consumption of liquid fuels and other petroleum is expected to decline by about 290,000 bbl/d in 2008 because of higher petroleum product prices and slower economic growth.

•  Adjusting for increased ethanol use, U.S. petroleum consumption is projected to fall by 440,000 bbl/d in 2008

•  Consumption in countries outside of the Organization for Economic Cooperation and Development (OECD) continues to grow rapidly, offsetting weaker consumption in OECD countries, especially the United States.

Production

•  The market remains concerned that the cushion of surplus production capacity of less than 2 million bbl/d (almost all located in Saudi Arabia) and/or stocks is insufficient to protect against possible changes in supply or consumption, especially as we enter the summer hurricane season.

•  The absence of a Saudi commitment to add capacity beyond its current goal of 12.5 million bbl/d adds to the uncertainty about the adequacy of future supply capacity growth.

•  Declining production in a number of non-OPEC nations, including Mexico, United Kingdom, and Norway, is largely offsetting increases in other countries.

•  Slow growth in non-OPEC supply is coinciding with disruptions in supplies from some OPEC countries, such as Nigeria.

•  Ongoing geopolitical concerns in several producing countries, including Venezuela and Iran, have contributed to oil price volatility.

Outlook

•   The combination of rising consumption, further downward revisions in the supply outlook for countries outside of the Organization of the Petroleum Exporting Countries (OPEC), and low surplus production capacity reinforce the perception that supply is having a difficult time keeping up with demand growth and accounts for much of the upward trend in oil prices.

The EIA's Short Term Energy Outlook is published monthly and is available at http://www.eia.doe.gov/steo.

Overview of Oil ETFs

Whether you believe the price of oil is going to continue to rise or is poised for a fall, oil ETFs are a good way for investors to establish exposure to dynamic oil prices.

Oil ETFs offer exposure to the spot price of oil (the price you would pay today) or exposure to the future price of oil.

Victoria Bay Asset Management's United States Oil Fund (USO) tracks the spot price of crude oil using futures contracts and other oil related futures, forwards, and swap contracts. The fund is marginable and short selling is allowed. Options on USO are also available.

Barclay's iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) tracks an index of crude oil futures contracts that are at least 5 months from expiration. ETN stands for Exchange Traded Note which means that you are buying an unsecured debt security.

In addition, the United States 12 Month Oil Fund (USL) is an exchange-traded commodity pool that is designed to track the price movements of oil. The fund uses a series of benchmark future contracts on crude oil to have the changes in percentage terms of the units’ net asset value reflect the changes in percentage terms of the price of light, sweet crude oil.

Another choice for gaining exposure to oil with futures contracts is the PowerShares DB Oil Fund (DBO).

Indirect positions can be established with sector ETFs. For example, see the ETF Theme Investing in Oil and Gas Services with ETFs.

Top Performers

Largest Spot Price Fund

United States Oil Fund (USO) - $760 million

Largest Futures Fund

iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) - $173 million