ETF Expert

There’s a lot being made about crude oil settling below $75 per barrel again. On Wednesday, 8/18/2010, the commodity fell to a 3-week low.

Yet there’s a larger trend that may be developing and that the mainstream media may be missing. Emerging market growth throughout Asia means an uptick in the demand for commodities… particularly, oil and agricultural products. This is one of the reasons that BHP Billiton (BHP) has been going postal to acquire fertilizer giant Potash Corp (POT).

Granted, some folks believe that the developed world will be mired in slow-growth stagnation and deflation; yet even these naysayers would probably concede that “petrol” has potential.

Here are 3 reasons why Oil ETFs are likely to outperform respective indexes over the next 3-6 months:

1. Iran and Israel. According to former US Ambassador to the United Nations, John Bolton, time has essentially run out on the West to thwart Iranian nuclear ambitions. Iran is loading nuclear fuel into its Bushehr reactor’s core this weekend. Any military strike after that point risks the harm of civilians because of radiation.

So is Israel planning to strike Iran this Saturday? Probably not. If it did, though, oil might instantaneously jump to $100+ per barrel, while non-treasury assets might get sold off with little discrimination. United States Gasoline (UGA) would be a reasonable hedge, contango problems notwithstanding.

While a military strike is unlikely, one has to believe that the Iranian government will trumpet its nuclear capabilities over the next 3-6 months. It follows that commodity markets would likely price in a “war possibility premium” due to back-and-forth threats surrounding the prominent oil producing exporter. 

2. “Hedgies” On The Hunt. Top hedge fund managers aren’t always right. Indeed, there are times when some have been painfully poor decision-makers. One needn’t look further than the infamous Long-Term Capital debacle to know the truth behind that statement.

Yet the list of top hedge fund managers that have been acquiring beaten-down oil stocks reads like a veritable “Who’s Who” List. Carl Icahn, Eric Mindich, Dinakar Singh, David Einhorn, Jeff Vinik and Steven Cohen – big name players went after names like Anadarko Petroleum, Ensco, Baker Hughes and oil services specialist Halliburton (HAL). While the hedge fund masters of the universe may have gotten in early, there’s certainly time for you to consider ETFs like the Oil Services HOLDRs (OIH) or PowerShares Dynamic Oil & Gas Services (PXJ).

3. U.S. Government Policies. The U.S. still doesn’t have an energy policy, and no coherent plan to remove ourselves from foreign crude oil dependence. Tack on the cumulative effects of the temporary drilling moratorium, the Gulf spill, the perceived need by the Fed for more stimulus… and you get a weaker U.S. dollar. All things being equal, a falling dollar benefits foreign equities, foreign currencies and commodities.

Energy-exporting emergers like Claymore Frontier Markets (FRN) and Russia (RSX) are likely beneficiaries.

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