How to Cash in on the Rising Price of Oil

Statues Kneeling Before an Oil Derrick

Tired of being robbed at the gas pump? Here's how to get the price of oil working for you instead of against you. It's time to allocate some of your investment portfolio in this commodity.

Things You'll Need

• Some funds to invest

Instructions

1. There are several ways to invest in oil, some more directly than others. It is possible to purchase futures contracts on oil directly through a broker, but only high-net-worth investors should take this route. A direct working interest in an oil and gas well is also possible, but this too is probably only appropriate for experienced investors. However, investors who qualify can reap not only large potential gains, but also substantial tax advantages.

2. A more practical route for many would be to invest in some sort of oil and gas limited partnership or master limited partnership-but a still better path might be an exchange-traded fund such as U.S. Oil, which invests directly in futures contracts but trades like a stock. A new fund called U.S. 12 Month Oil also resolves the issue which ETFs that invest directly in oil face when they must purchase futures contracts at the higher futures price and sell them at the lower cash price.

3. A broader-based approach for investors would be the IPath Dow Jones exchange-traded note. This spreads the investor between oil, natural gas, heating oil and gasoline. There are other instruments such as SPDRs and energy IShares that diversify investors as well.

4. Finally, there are a number of mutual funds such as the Vanguard Energy Fund and T. Rowe Price New Era fund that also spread the investor's risk among several different energy companies-but investors that seek individual stocks should look at companies like Exxon and Mobil.

Tips & Warnings

• A number of relatively new instruments are now available to common investors in the energy sector, as well as other sectors.

• Consult with your financial advisor before embarking on an investment program in oil or gas. Although these sectors can be very profitable, they do have real risks that must be considered.