Wednesday, 17 June 2009

Five ways to profit from oil

Five ways to profit from oil
Analysts warned last week that the average price of fuel could reach 115p a litre over the next few months - motorists will lose out but investors could profit from this rise.

By Rosie Murray-West
Published: 12:40PM BST 08 Jun 2009

Motorists are facing a summer of rising petrol costs, thanks to recent increases to the price of oil. Analysts warned last week that the average price of fuel could reach 115p a litre over the next few months.

Goldman Sachs, the city bank, has raised its forecast on the price that oil will reach by the end of 2009, which has already convinced many speculators to take the plunge. If you think that oil has further to go, however, there are still ways that you can benefit – rather than just fuming at the petrol pumps. Here are five ways to speculate on oil.

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1. Buy the big boys
BP and Shell are Britain's two big oil and gas companies. Both have been popular buys due to their high dividend yields and exposure to the price of oil. Neither company is expected to cut its dividend in the coming months, although this is likely to lead to an increase in borrowing.

Potential investors in Shell should note that UK investors need to buy Shell's 'B' Class shares.

2. Consider the minnows
BP and Shell may be the supertankers of the oil market, but you can also buy shares in other smaller companies which will also give you exposure to this market.

Many of them have already enjoyed healthy price rises, however, and you may feel that there is little scope for future gains. Tullow Oil and Soco International have recently seen huge rises in price. Dragon Oil and Bowleven are other possibilities in this sector.

3. Look at funds
If you invest in funds, exposure to the oil price is actually quite hard to avoid as commodities and resources companies make up about a third of the FTSE Index. However, some are more heavily exposed than others. Two BlackRock funds – BlackRock Commodities Income investment trust and the Blackrock World Energy fundhave large oil investments.

Investec Global Energy is another hefty investor in a combination of oil producers, refiners and services companies. If you are looking to take risk in this area, the CF Junior Oils Trust invests only in smaller gas exploration and production companies, including many of the minnows mentioned above.

4. Try an ETF or ETC
Exchange Traded Funds and Commodities have become increasingly popular with investors seeking easy ways to take a punt on commodities or indices.
An ETF is a relatively low-cost way of gaining exposure to the price of a commodity or to a specific index for either the short or long term.

They can be bought through stockbrokers. Lyxor, for instance, offers the Lyxor DJ Stoxx 600 Oil and Gas ETF, or ETF Securities offers a crude oil fund.

However, buyers of these funds should beware an effect known as 'contango', which occurs when oil prices for future delivery are higher than the current oil price. This effect has caused erosion on funds that invest in near-term futures contracts based on the price of oil, so ETF investments may not be as simple as they seem. Do consult a stockbroker if you are keen on investing in ETFs.

5. Spread betting
Many investors have been seduced by spread betting as a low-cost way of gambling on the price of commodities, but you should always beware the risks. With spread betting, you would take a bet on the future movement of the oil price, but could lose out very rapidly if the price goes the other way.

Companies such as City Index, Cantor Finspreads or IG will allow you to take a bet on the future price of Brent crude. However, do not indulge in spread betting unless you are sure you understand the implications and have appropriate measures in place to limit your losses.

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