Betting On Oil

Falling oil prices may signal not just a good time to invest in a new tank full of gas but also in oil itself. But do you know what it takes to bet the markets on crude? Ray Hennessey, editor of Smartmoney.com offers some advice that might fuel your interest.

A lot of people have heard about investing in oil on the stock market, but aren't too sure where to start or what to do. "It's very simple," Hennessey explains. "You are betting on a future price. So you are betting on futures, not stocks."

In essence, you are taking a guess on what the price of oil will be in a month, two months, up to 30 months down the road. It takes a lot of guesswork and speculation is abound. You take into consideration outside effects on the price like hurricane season and the war in the Middle East. "These are things you have to think about when you are investing in oil," advices Hennessey.

In the end, supply and demand always wins when it comes to betting on oil prices, he says. The Middle East war is a good example. People were worried prices would go up because of the conflict, but it wasn't effecting the price of oil. "What you had here was demand going down. That's why we've seen oil prices come down," Hennessey points out. "Here in the US we aren't using as much oil as we need to." This was why the higher prices people were predicting turned out to be wrong.

You can trade oil through trading in the oil pits, oil exchange-traded funds, which are like stocks, or you can actually bet on the Exxons of the world and get your dividends that way. "I think it is very dangerous to kind of play the oil game and bet on where the price is going to be," Hennessey warns. "You can, however, bet on the professionals that do it."

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by Jenn Eaker