) -- Investing doesn't just have to be about increasing wealth. It can also be a means to preserve it.
Successful investors -- from speculative day traders to steadier 401(k) participants, for example -- will adjust their holdings to craft a portfolio capable of meeting or beating the rate of inflation. With the price of home heating oil on the rise, and likely to keep increasing due to global politics, now might be a good time for investors to place a bet on the price per barrel to hedge against the costs of staying warm this winter. As they say: "If you can't beat 'em, join 'em."
Betting on oil price hikes can help ease the burn of home heating increases.
According to the U.S. Energy Information Administration, the mild winter thus far in the Northeast, where there is the highest concentration of oil-heated homes, has mitigated some expected cost increases.
The typical household is projected to use about 650 gallons of heating oil this winter, a decrease of about 4% compared with last winter. The cost per gallon will increase, however, averaging about $3.82 a gallon -- up about 13%, according to EIA estimates issued last week. The average home heating bill will total about $2,500 this year, an increase of roughly 8.4%. The good news, thanks to warmer-than-expected weather, is that the EIA initially estimated a 10% jump last month.
Those projections could prove to be moving targets later in the season due to a variety of threats to the world's oil supply chain.
On Monday, the European Union voted to support U.S. calls for a ban on imports of Iranian oil as punitive persuasion to get that nation to back away from an effort to develop nuclear weapons. Iranian officials have threatened to blockade the Straits of Hormuz, the oceanic shipping route for most oil-producing countries in that region.
"If the Straits of Hormuz close, oil will rise above $200 per barrel," warns Chris Faulkner, CEO of
Breitling Oil & Gas
, an independent exploration and production company based in Irving, Texas. "It is the one bottleneck that allows Iran to choke the West's oil supply."
Seventeen million barrels of oil per day passed through the Straits last year, according to the U.S. Energy Information Agency -- approximately one-sixth of global oil production and nearly 20% of all the oil traded worldwide. Iran itself exports between 2.2 million to 2.5 million barrels a day.
Iran isn't the only hot spot that could lead to tightened supplies and higher prices. Political conflict in Nigeria threatens its output of 2.5 million barrels a day. Tensions between Sudan and the newly independent nation of South Sudan over oil-related transit fees could curtail the nearly 500,000 barrels per day that flows from that area.
Domestically, it remains to be seen whether there will be any price-related pushback to President Barack Obama's refusal to grant a permit for the politically charged Keystone XL pipeline expansion pitched as running from Canada through Montana and Oklahoma to refineries in Texas for export.
All that volatility may not necessarily be terrible news from an investing standpoint, especially if your goal is to mitigate that 8.4% price increase for heating your home this winter by betting on companies in the oil business that profit while consumers get hit.
The big oil companies of the world --
-- are well-positioned to benefit when the global commodities marketplace inflates crude prices.
For example, in October, ExxonMobil announced that its quarterly profit of $10.3 billion was up 41% from a year earlier, in part due to rising crude prices. In April, the company's Q1 earnings spiked 69%.
Investing in the top oil companies will also net you a dividend yield that typically ranges between 2% and 4%.
If these individual stocks are too pricey for your budget, you may want to seek out mutual funds that include some of these top companies among their heavily weighted holdings.
Supply disruptions overseas -- even in the short term -- increase demand for alternative sources, which is good news for companies focused on drilling and exploration. Anadarko, for example, has oilfields in several U.S. States and, further North, Canada's vast oil sands could be a continued boon for
North Dakota and Montana are home to
a formation of shale covering about 200,000 square miles that is estimated by the U.S. Geological Survey to have as much as 4.3 billion barrels of potentially recoverable crude. Among the companies working to extract that oil are
Kodiak Oil & Gas
Northern Oil & Gas
MDU Resources Group
Pipeline owners such a
( CEG) may also their stock price rise in concert with oil prices, as could
, the world's largest oilfield services company.
Oil refineries feel the pinch of rising costs per barrel as their costs to buy oil go up even as demand for their finished product drops. Offshore drilling companies such as
(despite the Deepwater Horizon disaster) and
are key players in that arena.
The simplest way to hedge against oil inflation for most Main Street investors is to consider ETFs designed with that very goal in mind.
In its prospectus,
United States Heating Oil Fund
is described as "a way for investors and hedgers to manage their exposure to energy" and an ETF "designed to track in percentage terms the movements of heating oil prices." Year to date, the fund is up 5.6%, and it saw a return of 15.64% for a one-year period.
United States Oil Fund
is designed to track the price movements of light, sweet crude oil. Unfortunately its returns have been far from stellar, down approximately 21% so far this year and at -54.5% since its inception in 2006.
Other funds worth investigating are the
iPath S&P GSCI Crude Oil TR Index ETN
SPDR S&P Oil & Gas Exploration & Production ETF
(which has a three-year return of over 22%),
SPDR Oil & Gas Equipment & Services Fund
PowerShares DB Crude Oil Long ETN
(up a slight 0.14% for the year).
--Written by Joe Mont in Boston.
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