NEW YORK (TheStreet) -- Bigger-than-forecast inventory gains caused crude oil to drop two days in a row, but there are plenty of reasons why this commodity should appreciate and potentially hit the century mark.
Over the past six months, black gold has been oscillating back and forth in the $70-$85 range and is now at the uppermost point of its range. If it breaks up and out of this range, it could add an additional $15 per barrel.
On the supply side, the recent increases in crude stockpiles likely will dissipate in the coming months. The driving force behind this is relatively flat production. When the global financial meltdown put a damper on demand for crude, OPEC cut production levels to reach an economic equilibrium point.
But both developing and developed nations have emerged from the Great Recession, and growth in global GDP is expected to reach 4.5%. This should bolster demand for crude, resulting in a supply and demand imbalance that will slowly eat away at excess inventories.
Granted, exploration and production companies have the ability to increase the amount of usable crude, solving the anticipated supply and demand imbalance, but the time lag between discovery and delivery to the pump is so large that a short-term impact on prices is highly likely.
Lastly, the U.S. dollar is expected to remain weak and unstable, which will likely support the price of crude oil. Crude is traded in dollars, and as the dollar declines in value, the commodity generally becomes more attractive to foreign investors.
Some ways to play crude include:
US Oil Fund
, which closed at $41.52 on Wednesday.
iPath S&P GSCI Crude Oil Ttl Ret Idx ETN
, which closed at $27.50 on Wednesday.
PowerShares DB Oil Fund
, which closed at $29.12 on Wednesday.
Although an opportunity seems to exist in crude oil, it is equally important to consider the volatility and inherent risks involved with investing in commodities. To help mitigate these risks, an exit strategy that identifies a price point at which an upward trend in these equities could come to an end is of utmost importance.
According to the latest data from
, these price points are: USO at $39.37; OIL at $26.05; DBO at $27.62. These price levels change on a daily basis, and updated data can be accessed at www.SmartStops.net.
-- Written by Kevin Grewal in Laguna Niguel, Calif.
At the time of publication, Grewal had no positions in securities mentioned.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.