How to Invest in Rising Oil Prices

When oil prices rise, there are many areas of the oil industry you can invest and trade in.

Oil prices have come down a great deal since the summer of 2008 as have all commodity stocks. In December 2008, OPEC just announced that they were going to cut oil production by 2 million bpd (barrels per day). That news from OPEC didn’t cause oil prices to go up, in fact oil prices dropped down again with other news that came out at the same time. That news was that the oil reserves of the US were higher than expected.

Different Ways to Invest in Rising Oil Prices.

There are various ways to invest in rising oil prices, you can buy stocks in companies who do the exploring and the drilling for the oil. You can buy companies that sell the equipment to these companies to drill for oil, or you can buy companies that do the research to find places for the various oil companies to drill. And you can invest in the actual commodity oil itself.

These are the sectors in the oil industry that you need to look at, some web sites list companies under slightly different sectors phrases.

  • Oil & gas drilling and exploration
  • Oil & gas equipment and services
  • Oil & gas pipelines
  • Oil & gas refining and marketing

Oil Industry Companies and Oil and Gas Services Sector ETFs

  • DIG is the heavily traded oil ETF that seeks 200% of the Dow Jones US Oil and Gas Index holds companies like Exxon, Chevron, ConocoPhillips and Schlumberger.
  • IYE – iShares Dow Jones US Energy is a broad based oil and gas industry ETF with large oil and gas companies like Chevron, Exxon, Schlumberger and ConocoPhillips comprising 48% of the fund.
  • XLE – SPDR Energy Select Sector ETF also has large oil and gas companies.
  • XOP – SPDR S&P Oil and Gas Exploration and Production ETF tracks the total return performance of the S&P Oil and Gas Exploration and Production Index. This ETF is not as top heavy in the large companies as the above ETFs, holding smaller companies like Frontier Oil, Sandridge Energy, Gulfport Energy and GeoResources Inc. XOP does not hold more than 2% of any one company.
  • IEO – iShares Dow Jones US Oil and Gas Exploration and Production invest in at least 90% in companies of the underlying index.
  • IEZ – iShares Dow Jones US Oil Equipment Index invests in at least 90% in companies of the underlying index.
  • PXJ – PowerShares Dynamic Oil and Gas Services invest at least 80% in companies that assist in the production, processing and distribution of oil and gas.
  • XES – SPDR S&P Oil and Gas Equipment Services tracks the total return performance of the S&P Oil & Gas Equipment & Services Select Industry Index

Deep water and offshore drillers

There are the deep-water drillers as well, offshore platforms and the companies that look for the oil offshore. There is limited competition here and last summer there was a backlog of contracts. This group could be interesting to watch once the new congress and administration are in office since they recently voted to repeal the offshore drilling ban.

Some of the more notable companies in this sector are:

  • Transoceanic (RIG)
  • Noble Corp (NE)
  • Diamond Offshore (DO)
  • Atwood Oceanics (ATW)
  • Bristow Group (BRS)
  • Ensco International (ESV)

Buy an Oil ETF

Not literally, but you can invest in oil through a couple of ETF’s with the symbols of OIL and USO. These ETF’s track the price of crude oil. With this you’re not investing in companies but the movement of the oil price itself.

Another ETF with a symbol of DXO is the crude oil double long, this is an ETF that if the price of oil moves up, this ETF moves up twice as much. It is more risky to the downside as well, meaning you can lose twice as much.

When you look for ETFs to buy in the oil industry, many places will have them listed under Natural Resources or Specialty Natural Resources.

Sam Montana © 18 December 2008



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