How to best Earn Money when Investing in Oil

When investing in oil keeping in mind the recent volatility in price of crude oil has been both on the upside and during the past few months has seen a decline from the record high prices, more difficult to make a profit. One can certainly purchase good quality oil company stocks for the long term and collect any dividend distribution. I am of the opinion long term (beyond a year) the price of crude will resume the climb on the up side, because world demand for crude will improve as economies around the world eventually return to prosperous times requiring the resumption of increase demand and thus higher prices will curtail because of limited supply, despite the use of alternative sources of energy, conservation efforts, and more fuel efficient forms of transportation. Buying and selling options (Calls’ or Puts’) underscore many crude oil stocks hopefully profit from the volatility of crude oil prices. However most people are not savvy investors or knowledgeable how to buy or sell options, and could handle a financial loss. Certainly options provide an instrument to make money when correctly anticipating direction of future decline or increase in price of an oil stock.

One method for investing in oil owning a basket of oil stocks and underlying oil options as a hedge against down side risk and upside turn in the price of crude oil affecting oil stocks, which a managed closed or opened funds are suitable for this purpose: Fund trades at market value or trades at or below the market value. When a closed end fund is purchased below fair market value offers a bargain price for upside potential reward. When selecting a fund to buy a good long term track record helps to understand how the fund performed during the times when oil stocks increased or decreased according to market conditions, and how much the fund distributed dividends and any capital gains to shareholders. Also, evaluate what is the commission charge when buying and selling a fund and any other charges or fees. When a fund distributes a dividend and any capital gain, most funds provide an option to investors to re-invest the proceeds without incurring any fee or charge. However, dividend and capital gain distribution does incur an income tax for most investors, unless the investment is held in a retirement account. Best too consult an accountant for tax information.

One of the longest historical track records for a closed end oil fund is ‘Petroleum Resource Fund’ trading on the New York Stock Exchange (symbol PEO). The fund has previously owned call and put options on oils stocks, as a hedge to take advantage to anticipate depreciating oil stock prices and upside turn in oil stock prices according to market conditions. In 2007 the fund had a record annual rate of distribution of 11.61 percent (Including $3.82 Net capital gains distributed), keeping in mind that is not indicative of future gains. As of end of June 2008, the ‘Petroleum Resource Fund’ has reported net capital gain realized during the first six months of the year a $1.70 per share. How the fund will perform during the remaining six months of the year does depend on how well fund manages their portfolio and correcting anticipating oil and stock market price change. At least since 1993 ‘Petroleum Resource Fund’ has distributed Net Realized Gains and realized a annual rate of return for their investors.

Reference:

‘Petroleum Resource Fund’ – Annual Report 2007 and Semi-Annual Report –
June 30, 2008