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Editor's note: If you want to learn more about how to start investing in oil, you can also read Matt's essays on Alberta's oil sands.

How To Invest In Oil & Gas

By Dr. Steve Sjuggerud
Tuesday, May 30, 2006

T. Boone Pickens made $1.4 billion dollars in income in 2005 from managing money, according to an article in last week's Wall Street Journal.

It is "the largest one year sum ever earned... larger even than Michael Milken's legendary $550 million haul of 1986..." according to Trader Monthly.

In case you don't know, T. Boone Pickens is an oil investor... and a good one at that...

For the year 2005, folks who invested in Pickens' oil stock fund made over 100%. And those who invested in his much riskier commodities pool made over 700% (that's not a typo).

Pickens appeared on CNBC last week. He predicted higher oil prices. And he says that natural gas is a cheap and credible alternative for oil investors. He also predicted that gas stations serving natural gas is something we might see in the not-so-distant future.

Pickens made his money last year investing in oil stocks and trading commodities. If he can make over $1 billion doing this stuff, then we need to know what our options are for investing in the oil patch...

Here are the major ways to play it:

1) Investing in oil through your brokerage account.

The simplest and most direct way for most people to make a bet on the price of oil is by investing in shares of USO (the U.S. Oil Fund). USO is not a company, it's simply an asset created to track the price of oil. Investors can buy it like a stock.

Your return with USO is simply whatever the price of oil does, minus a tiny fee. If you're interested in investing in oil, this the easiest way to do it.

2) Investing in oil stocks.

You can make or lose a lot of money investing in oil stocks, depending on how much risk you're willing to take...

You can buy the Big Oil stocks... like ExxonMobil (XOM) and ConocoPhillips (COP), which are safe and diversified. Or you can really take a risk by investing with a small oil stock that specializes in exploration or operates in a risky locale. You could lose it all, or make many times your money.

You've got a lot of choices when it comes to investing in oil stocks... and we'll cover these choices in the coming weeks.

3) Investing in the whole oil sector with just one stock.

There are a handful of exchange-traded funds (ETFs) relating to oil. These hold a handful of the major oil and energy companies. The major ETFs here are OIH, IXC, IYE, XLE, and VDE. The easiest place for oil investors find more information about all of them is at www.etfconnect.com.

There are hundreds of mutual funds as well. But we prefer investing in exchange-traded funds, like the ones above. The cost of ownership is lower, and you can buy and sell them any time through the day.

4) Gambling the T. Boone Pickens way: Investing in oil through derivatives.

Trading oil futures, in general, is extremely risky. You can't make 700% returns without taking on a heck of a lot of risk.

I really don't recommend this world for most individual investors. One firm that has done a nice job in the past for newer oil investors is Lind-Waldock.

Spend a while educating yourself before investing here. Sue Rutsen is incredibly nice and patient, and specializes in commodities options. You can find more about her and her firm at: www.rmbgroup.com.

5) Investing in oil and gas limited partnerships.

We know many legitimate folks out there (like our friend Cactus Schroeder) that have been creating these types of oil investments and making money for investors for many years. However, we're particularly skeptical of these, and really don't recommend investing in oil this way.

In general, unless you REALLY KNOW what you're doing, then you probably shouldn't invest in oil and gas limited partnerships.

Well, we've just scratched the surface today on the options available for investing in oil. This is by no means a comprehensive list. At DailyWealth, we promise we won't take too much of your day, so we're going to stop here.

In the weeks to come, we'll fill in the gaps, and give specific ideas for investing in oil. Before we got that far, we wanted to give you a quick overview of what's out there.

While we can't promise T. Boone Pickens-like returns, we do think we can steer you in the direction of the safest, smartest ways to invest in oil in the coming weeks.

Good investing,

Steve & Matt




Market Notes


HOW TO MAKE MONEY UNDERWATER

As Matt Badiali reminded your DailyWealth editors at an investment conference last week, it’s often easier to make money by selling “picks and shovels” than it is finding the mother lode.

One of Matt’s favorite picks and shovels plays in the oil industry is Oceaneering International (OII).

As one of the largest operators of underwater equipment in the world, Oceaneering helps giant oil producers like British Petroleum do just about anything that needs done while drilling in deep water.

As the rise in Oceaneering’s share price shows, selling picks and shovels is a great business. Matt’s S&A Oil Report subscribers are up 40% since getting in.

A pure picks and shovels oil play… Oceaneering (1-year chart):
Investing In Oil - Oceaneering International (OII)


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