I think every portfolio should contain some exposure to oil. Oil is one of the most essential commodities on the market today, and by owning oil you get a hedge against inflation, exposure to economic growth, and exposure to economic activity more generally. Unless there is a radical new discovery that makes oil and fossil fuels obsolete, oil will be in strong demand, and if you pick the right assets in the oil sector, you can do extremely well.
But how should you buy oil? There are hundreds, if not thousands of stocks out there of companies that in some way profit from the exploration for, the production of, and the shipment of oil? The difference between picking the right one and the wrong one could mean the difference between making fortunes and losing your investment. In what follows I have provided readers with a few ideas.
1. Buy an oil futures contract or ETF
The most straightforward way to invest in oil is to simply buy oil. Since most retail investors don’t play the futures market, the best way is through an ETF such as the United States Oil Fund LP (NYSEARCA:USO). This fund buys oil futures contracts, and yet it trades on the NYSEARCA like an ETF. The great thing about this fund is that if you buy it you don’t have to worry about company risk such as rising production costs, politics, acts of God such as the BP (NYSE:BP) Gulf Oil Spill, or incompetent executives. The downside is that a good oil company makes money even in a falling oil price environment, whereas the USO trades with the price of oil. Another problem is that you have to deal with the fact that the fund has to sell old futures contracts and buy new ones every month. This adds costs and detracts from the fund’s value over long periods of time. So this is perhaps best used as a trading vehicle, but I wouldn’t hold it long-term.