Melissa Davis

Buckling Up to Ride the Oil Roller Coaster

03/04/03 - 06:51 AM EST


Investors are mining the energy sector like old-fashioned wildcatters.

They know there's money to be made, what with the war looming in Iraq and potential production shortages driving prices skyward. Still, most people have been stymied trying to figure out where the next big gusher will be.

Indeed, they've hit some big dry holes. Stock prices for the three oil majors have languished this year, despite soaring energy prices and rising company profits. And while most analysts continue to view these companies as great long-term prospects, hungry investors are looking for ways to hit pay dirt now.

Industry experts caution that with prices where they are, there's no shortage of risk in chasing the energy sector right now. But after examining the possibilities -- ranging from volatile energy futures to stable royalty trusts to obscure niche players -- observers settled on a few pointers for treasure-hunting investors.

Decent Exposure

There's only one real way for investors to fully exploit $40 oil and $8 natural gas: fully expose themselves to the risks -- and rewards -- of volatile energy prices.

"One of my clients is an oil trader," says David Edwards, president of Heron Capital Management and a contributor to RealMoney.com. "If the prices are volatile, he just hauls it in."

Edwards himself doesn't trade energy futures -- and doesn't necessarily recommend that others do it, either. But for retail investors who can stomach the risk, the New York Mercantile Exchange offers just the vehicle for betting on energy prices. The exchange, which caters primarily to professional energy traders, began reaching out to retail investors last June by offering mini futures contracts. But so far, the contracts have yet to catch on.

"We do a little better with the crude oil contracts than the natural gas ... because the oil markets are more visible," said NYMEX spokeswoman Nachamah Jacobovits. "But the volatility makes [both] somewhat challenging."

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Melissa Davis


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