Over the past decade oil has become a very popular investment theme as demand from China and India as well as other developing countries has pushed demand up to the available supply. At the same time innovative new products such as the Oil ETF have caused a sharp rise in investor demand. A persistently weak dollar over the past 10 years has also been a source of market support and many think this trend will continue or get worse. Is Oil Investing something you should consider? If the answer is yes, how should you invest?
There is really only one reason to invest in oil as a commodity and that is if you believe the price will rise in terms of U.S. Dollars in the future. If you would've purchased crude oil in 1998 when it was trading just above $10 you could've made huge profits by 2008 when prices soared to over $145 per barrel. The biggest issue with high gas and fuel prices has been that it takes the wind out of the U.S. economy which in turn causes a slowdown in consumer spending as well as gas demand. Huge swings in the demand for gasoline and fuel especially in the U.S. tends to cause big swings in the price of crude oil and related products as well. For example, after climbing from $10 all the way to $145 over a 10 year period 1998-2008 it only took about 6 months to fall all the way back to $30 during the great recession, so things can get wild.
Most people are much better off owning an oil stock etf which contains a basket of oil related stocks instead of owning the actual commodity. This is because the earnings of oil companies tend to be less volatile than the price of oil and oil companies can continue to rake in the cash even if oil prices just stay where they are instead of rising. If you look back at comparisons of the price performance between USO the most popular crude oil etf and XLE the most popular Oil Stock ETF you will see that XLE has strongly outperformed USO since it's inception and this will most likely continue into the future.
USO or even the double oil etf - UCO can be used for trading short term swings in the price of crude oil, but you need to have good timing skills to make money at that game. Another way traders use financial derivatives is to short the crude oil market by using the double short ETN DTO or double short ETF SCO. Both of these will rise 2% on a day when crude oil falls 1%. Professional traders are the ones who most consistently do well with most of these ETFs, even they have trouble getting in and out fast enough. For most of us we are much better off in a good oil stock etf such as OIH or XLE.
