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The Economics of Oil Favor Canada ETFs and Oil Services ETFs

04 January 2011 at 3:39 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

For the better part of 2010, most economists had suggested that global GDP would decelerate into 2011. Over the last 3 months, however, worldwide forecasts have been revised; many now believe that developed economies like the U.S. and Germany are accelerating, while scores of emerging countries will continue to grow in the 6%-8% range.

With more economic expansion, particularly in the world’s largest economies (i.e., U.S., China) comes an increase in demand for oil. And while one might think that the oil exporters in OPEC could supply the world’s thirst, there’s little reason to believe that they would. In fact, as recently as December 11, Saudi Oil Minister Ali al-Naimi explained¬†that there was “absolutely” zero reason to change production.

And then there’s the problem of the struggling euro and stuggling dollar. Commodities have surged due to fiat currency woes, where precious metals and base metals have been the biggest beneficiaries. Oil¬†appears destined to climb in 2011 as more and more investors begin to draw comfort from currency proxies. (Think petro-dollars.)

If there are greater risks of demand increasing rather than decreasing, due to sustained growth in China and economic recovery elsewhere, supply would need to be ramped up. Non-OPEC producers in Canada and Russia can step in, and their respective ETFs are energy intensive. Consider iShares Canada (EWC), Small Cap Canada (CNDA) and/or Russia (RSX) if you need to bolster your energy weighting.

Yet you may be more intrigued by a pure play. And you may also be convinced that supplying the fossil fuels needed will be a challenge, even if demand were entirely flat. Investors should look to the equipment and service providers, either in SPDR Oil and Gas Equipment/Services (XES) or iShares Oil Equipment/Services (IEZ).

Granted, one might be tempted to shop for bargains in the bin. Yet the easiest exposure is a sub-segment approach, where Weatherford, Schlumberger, Halliburton and Baker Hughes have been pre-wrapped in an attractive bundle.

It is true that there are plenty of scenarios to trip up the energy investor. China could clamp down too hard on inflation and/or the U.S. could falter under the weight of its weak housing and unemployment. For that matter, commodity prices could drop, the U.S. dollar could rise and/or regulations could become too restrictive. (Look no further than the first 9 months of 2010, where a drilling moratorium and a summertime economic slump slammed XES and IEZ.)

Nevertheless, even commodity bears would have difficulty disputing fossil fuel supply and demand. The world needs “old energy” under almost any circumstances. That’s why the efficiency experts and equipment¬†innovators in Oil Services ETFs may shine in 2011.

You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can review more ETF Expert features here.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFseasier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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