ETF Talk: Striking Black Gold

The continued weakening of the U.S. dollar could spur a mini-gusher for investors looking to profit from oil. Also known as black gold, oil is among the commodities that tend to be inversely related to the strength of the U.S. dollar. As the dollar dips, the price of oil rises. Indeed, the exploding U.S. debt is putting downward pressure on the dollar with no change of direction in sight.

Oil recently made big news when crude soared higher than $80 per barrel. The question now for investors is whether this trend will continue. No matter if you think that oil will soar in the future or if you believe that the dollar soon will recover and send the price of oil falling, an exchange-traded fund (ETF) is available to meet your needs. Specifically, ProShares offers both leveraged long and short oil ETFs.

ProShares Ultra Oil & Gas (DIG) seeks daily investment results, before fees and expenses, which correspond to twice (200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. 

Below, you will find a table of the top ten companies and weightings for DIG:

Several indicators point toward oil prices continuing to rise in the foreseeable future. First, the futures market is signaling higher prices for oil and gas stocks during the coming months. Second, the dollar keeps falling and putting upward pressure on the price of oil. Since oil is priced in dollars, foreigners can buy oil much more cheaply as the dollar drops. Third, as the U.S. government takes on more debt, investors expect further depreciation of the dollar.

Also notable is the world’s increase in energy consumption and demand. For example, China and India this year are expected to produce 11 million and 2.5 million cars, respectively, while auto sales in Brazil are estimated to have surged 20% in September alone. This increased production and consumption push oil prices higher, along with rising economic activity as the recession ends. In addition, oil, like all commodities, is a finite resource. Some oil bulls argue that global oil production may soon peak.

On the other hand, ProShares UltraShort Oil & Gas (DUG) seeks daily investment results, before fees and expenses, which correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Oil & Gas Index.

If the dollar starts to rise, investors may not need to use commodities such as oil as a hedge any longer, and that likely would push down the price of oil. This fund also might appeal to investors who believe that the worst of the recession may not be over, and that further economic problems lie ahead.

Also important for the prospects of this bearish fund is that oil is a scarce commodity. If oil production peaks, and a global climate deal is reached, alternative energy could serve as a substitute in the future. A global climate agreement could cut global crude demand by about four million barrels per day, forecasters estimate. 

If you want my advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. Please keep in mind that I am happy to answer your questions about ETFs. To send me a question, simply click here. You may see your question covered in a future ETF Talk.