How to Invest in Oil

Oil is up some 30% in the past month. It is at $68.58 a barrel and at its high since November. OPEC leader Saudi Arabia states it may be up to $75 at year end. In comparison, gold is only up 11%. How can we make money in this uptrend?

One way is to buy ETFs or ETNs. There are many of these. Some like Deutsche Bank Power Shares Double Long Crude Oil (DXO) leverages your investment and is supposed to go up two times for every one unit rise in oil. Only it does not always work that way if one buys it long term. One needs to be careful using ETNs because of this. However, DXO was at about $1.76 in January and now it is around $4.50. The ETN DBO by Power Shares does not leverage. One cans also short or double short oil using ETNs or ETFs. An investor can find gold, grains, currencies, baskets of different commodities, silver or the dollar to buy long or sell short. One can use them to play currencies. You can find these ETNs and ETFs in the WALL STREET JOURNAL under the Exchange-Traded Portfolios section.

There also other ways to buy oil and natural gas. The Master Limited Partnerships (MLP) is an excellent method for investing in this area. There are many excellent vehicles for this. They pay high dividends in cash or share re-investment. Because of the high payments, one should investigate whether their investment should be in a tax free account like an IRA or in a taxable account. You need to look into this carefully. If you place it in a tax advantaged account, you need not worry about the tax problems that can occur unless the UBTI (unrelated business taxable income) threshold is breeched.

MLPs are generally Canadian natural resource companies that have oil and natural gas pipelines. They are energy income trusts. There are also closed end funds with a portfolio of MLPs in them. They spread the risk by owning many MLPs just like a mutual fund has many stocks,

Two excellent MLPs are Kinder Morgan (KMP) has gas pipelines and pays 8.2% yield. Enbridge Energy Partners (EEP) has oil lines and yields 9.8% currently. Examine the fundamentals of each company to determine if it fits your investment outlook and if you think it is a good investment.

There are many closed end funds that hold a mixture of MLPs. Tortoise Energy Infrastructure Corporations (TYG) yields 8.54% and holds MLPs in various energy areas like gas, oil and coal. There are other Tortoise MLPs to look at as others that give good diversification.

Another well diversified MLP is the Claymore Canadian Income Fund (ENY). It is owns many MLPs and yields 6.27% now. It has increased by 47% since its March low. These MLPs are a good place for making high income from dividends and provides safety in the sense that it invests in the energy sector. If oil makes $75 a barrel, these will rise as well.