Investing in Oil: How not to

Some have benefited and some got hurt by the precipitous fall in oil prices in the last few months. Oil is a commodity and it has its own cycles. It might be possible to bring some profits by contrary investing into oils rise.

Those who believe the oil prices are poised to increase and who are looking around to find the optimum investment vehicle, should be very careful in selecting the right vehicle. One of the easiest ways to get into speculation with oil prices is to purchase ETN's that follow the monthly future contracts, such as USO (United States Oil ETF). However, one needs to understand well that these products don't own physical OIL or owning them doesn't necessarily mean physically owning OIL or oil products. In fact, these follow near month future prices.

Following near month future prices doesn't guarantee being able to follow price of oil. In some cases, future contracts may get much more expensive compared to oil itself. Take a look at the table below that shows the monthly returns for  It shows monthly returns for USO since its initial offering. As you can see, it can't capture the amount of return from the crude oil. In my opinion, it's more of a speculation vehicle rather than an investment product.