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Oil ETFs Warm Up as U.S. Chills Again

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Oil prices are off to great start in 2014 thanks to a prolonged and severe winter in the northern hemisphere, supply shortage and slowly building Chinese demand. Most of the oil ETFs gained around 10% in the last month to reach a fourth-month high.

Chilly weather across most parts of the U.S. aided oil demand among residential/commercial consumers. In fact, the nation is not yet done with polar vortexes and snowstorms, as another spell of snow is forecasted for this week. This will surely heighten the demand for heating oil in the coming days (read: Beat the Cold Weather with These Hot Sector ETFs).

On the contrary, the inventory level for heating oil has been declining. Per the government data released last week, stocks of distillates including heating oil, were 10% below year-ago levels and 22% less than average around this time of the year.

To add to this, investors are pinning hopes on the economy of China which has recently reported strong export and record credit growth numbers for January, stirring optimism around the world’s second largest economy boosting energy prices (read: China ETFs in Focus on Strong Credit and Trade Data). Also, a subdued dollar helped the oil prices to soar in recent sessions.

As a result, light, sweet crude for March delivery was up 88 cents to $103.31 a barrel (as of February 19, 2014) on the New York Mercantile Exchange. Brent crude for April delivery, the global benchmark, added a penny to reach $110.47 a barrel.

The impressive jump in crude and Brent prices also had a big impact on oil ETFs lately, helping these to gain. Below, we have highlighted a few popular oil ETFs that could be interesting plays in the coming days, given the prediction of another round of snow and the general push back into commodity products (see: all the energy ETFs here).

United States Oil Fund (USO)
This is the most popular and liquid ETF in the oil space with AUM of over $1.13 billion and average daily volume of over 5 million shares. The fund seeks to match the performance of the spot price of light sweet crude oil West Texas Intermediate.

As the fund provides exposure to front-month oil futures, traders need to roll from one futures contract to another, thereby enjoying the benefits of a roll yield. If the front-month contract is higher than the next-month contract (also called backwardation), the roll yield is positive. The ETF has a 0.45% expense ratio, and it has gained nearly 4.50% year to date.

PowerShares DB Oil Fund (DBO)

This ETF also gives investors exposure to crude oil, and it also sees solid assets under management at about $308 million. The product tracks the movements of West Texas Intermediate (WTI) light, sweet crude oil. It charges an expense ratio of 79 bps. DBO gained 3.25% year to date.

iPath S&P GSCI Crude Oil Index ETN (OIL)

This is an ETN option for oil investors, tracking a spot price benchmark of WTI crude. So far, it has garnered $222 million in assets. The product charges 75 bps in fees. This ETN is up roughly up 4.80% year to date (see ETFs vs. ETNs: What’s The Difference?).

Bottom Line

Despite the recent increases, the U.S. Energy Information Administration (EIA) expects U.S. heating oil prices to average $3.82/gallon this winter, down 1% from last year's winter heating season mainly due to the stronger output on the global level. 

So investors really keen to play in the energy space can ride on this short-term positive blip. Otherwise, increased domestic production suggests a downside risk for the sector once the spring arrives. 

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