ETF Talk: OPEC Fails to Stem Falling Prices

The Dec. 17 decision by OPEC to slash its daily oil production output by 2.2 million barrels a day failed to stop the downward slide in prices. The move does show that OPEC nations are banding together in an attempt to stem further oil price drops. OPEC still has significant clout, but market forces are pushing oil prices down further due to reduced global demand.

Indeed, the price of oil fell below $38 a barrel on Dec. 23, amid thin pre-Christmas trading. That price is more than $100 below the $147 a barrel mark that oil topped out at less than six months ago in July. It also marked an oil price plunge of more than 70%.

Oil prices have slipped to such an extent that it remains an open question how much further they will fall. Forecasters are predicting that oil prices could fall to $30 a barrel or less in the coming months as worldwide economic conditions weaken.

For investors, there is no rush to buy oil exchange-traded funds (ETFs) right now. IHS Global Insight Chief Economist Nariman Behravesh recently predicted that oil prices could tumble all the way to $30.

"With the economic outlook deteriorating by the day, futures markets for commodities have not priced in the full extent of the "demand destruction’ taking place," Behravesh said in a research note.

I am skeptical that the cut in oil supply that takes effect on Jan. 1 will halt the falling price of oil. Shortly after the agreement was announced, oil prices fell $3.54 to $40.06 a barrel on news that weekly data showed oil inventories in the United States — the world’s biggest oil consumer — growing due to reduced demand. Keep in mind that the latest production cut is the third that OPEC has announced this year.

The 11 OPEC members that are bound by the latest output limits will cut their supply to 24.845 million barrels a day — down nearly 15% from September’s output. OPEC’s rationale for cutting its supply of oil is supported by its Dec. 16 monthly market report that predicted demand for its crude oil will fall by 700,000 barrels a day this year and will drop by at least that amount in 2009 as economic conditions sag.

One media report quoted an unnamed senior OPEC official saying "reasonable" member nations in the group would accept short-term prices of around $50 to avoid worsening the current economic downturn.

The market clearly is going the other way.

The good news for investors looking to profit from the inevitable rebound in oil prices is that exchange-traded funds (ETFs) are available to help you do so when the time is ripe.

Two funds that you may want to become familiar with are United States Oil Fund ETF (USO) and iPath S&P GSCI Crude Oil Total Return (OIL). USO is an ETF, while OIL actually is an exchange-traded note (ETN).

A visual description of the sliding price of oil is presented in the above chart of United States Oil Fund ETF (USO). Oil prices have undergone a pretty steady decline since Sept., and I don’t expect that trend to change anytime soon.

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