Since the market lows in crude oil in the late 90′s growing demand from emerging markets and a realization that the easy oil has been found combined to make oil a very popular investment theme. At the same time innovative new products such as the Oil ETF have caused a sharp rise in investor demand. The Dollar has been weakening since 2001 so this has kept an underlying bid under the price of crude oil. Is Oil Investing something you should consider? If the answer is yes, how should you invest?

An investment in actual crude oil is basically a bet that the price of oil is going to continue to rise as that is the only way to make money. The price of oil went up over 1000% between the low in the late 90s and the high that occurred in the summer of 2008, so it’s possible to make lots of money in commodities if you have good timing. 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. These swings in demand with a fairly constant supply cause prices to move quite wildly which can be seen on a regular basis. After rising over 1200% between October 1998 and July 2008 prices turned around and fell almost 80% in only 6 or 7 months at the end of 2008, so this is not a market for the timid.

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. You can gain exposure to the downside as well by purchasing the ETF – SCO or the ETN – DTO which both designed to rise as the price of crude oil falls. Most of these financial instruments are designed for short term traders and do not work well for long term investors. For longer term investors the return they can achieve from a good oil stock ETF such as XLE is hard to beat.