Want to make money from rising oil prices?

As global tensions put pressure on the cost of crude oil, sending petrol prices above £1 a litre across the UK, This is Money investment writer Philip Scott investigates how investors can profit from rising oil prices.

What price $100?: Experts say the cost of crude could pass that milestone any day now

A languishing dollar, rising tensions in West Asia, and reports of diminished reserves in the US have sent the oil price soaring.

This week, West Texas Intermediate crude firmed to a record high of $98.62 a barrel. Already in 2007, prices have increased by a staggering 60 per cent and many experts believe 'black gold' could be about to break the $100 barrier -- and still have some distance to run.

The booming economies of China and India now account for 27 per cent of world orders for oil and the International Energy Agency has cautioned that demand in these emerging markets will cause the oil price to rise even further.

Tim Guinness, manager of the Investec Global Energy fund says: 'The oil price is likely to have to rise to $150 a barrel before demand is significantly affected.' He believes there is still room for investors to participate. 'Oil and gas company shares are valued as if oil will be $55. If it averages say $85 there is big upside of 50 per cent plus. If it goes to $150 there could be huge upside of 100 per cent or more.'

Nik Bienkowski, head of research at ETF Securities, an exchange traded fund provider, adds: 'A lot of people laughed when $100 oil was mentioned two years ago, but now everyone from Mexican tortilla buyers to Italian pasta consumers realise cheap commodities may be a thing of the past. $100 a barrel oil is not so funny anymore.'

Robin Batchelor manager of BlackRock's MLIIF World Energy Fund says the oil market looks set to remain tight over the next 18 months. He adds: 'Many businesses are still valued assuming an oil price 30 or 40 dollars below today's level, so investors can benefit as valuations move up to bridge the gap.'

So how can you profit from a rising oil price?

Funds

You don't have to invest in a specialist oil portfolio to get exposure and gain from higher oil prices. Managers such as Bill Mott, responsible for PSigma Income, and Neil Woodford, who manages Invesco Perpetual Income, have more than 10 per cent of their funds

invested in the oil and gas sector.

Bradley Mitchell, manager of the Royal London UK Growth fund, has been predicting increased oil prices for almost two years and has been positioning his fund to take advantage of the hike. Mitchell has invested in specialist oil firms, such as Rockhopper Exploration, which is prospecting for offshore reserves around the Falkland Islands. Shares in the firm soared 10 per cent a few days ago on good news about the firm's latest seismic surveys.

If you are looking for a more specific play there are general energy funds available. Mick Gilligan of Killik & Co cites Investec Global Energy, which invests in a combination of oil producers, refiners and services companies. His 'top ten' holdings include BP, Shell, Exxon and ConocoPhillips.

Gilligan also notes the ABN AMRO Energy fund, which is Luxembourg based but available to retail investors in the UK, as well as the Australian portfolio, Oceanic Natural Resources.

But if you want something a little more adventurous - and risky - you could invest in the Junior Oils Trust (JOT). Managed by Angelos Damaskos, the fund buys into small oil stocks, which the manager believes have the potential to grow rapidly. They may also be targets for a takeover by one of the multinational oil producers, who are discovering that buying up other companies is the easiest way to increase their own oil reserves.

Large players such as Shell, Exxon and BP are desperate for extra oil reserves as they simply do not have enough to meet demand, so they will be keeping an eye on the smaller players' fortunes.

One holding in the JOT is Burren Energy and the recent announcement of a takeover approach for the firm makes it the fifth core holding to be the subject of a bid during the past three years.

Mark Dampier of Hargreaves Lansdown, an independent financial adviser, says: 'Damaskos will only buy shares in companies that are cash generative and have proven oil reserves. He focuses the portfolios on his best ideas, holding a concentrated portfolio of just 23 stocks (of which the largest 10 holdings account for 50 per cent of the fund) and keeping a little cash aside to take advantage of any new share issues that come to the market. Since launch the fund has grown by over 87 per cent, which is well ahead of the oil price.'

Courtesy: www.thisismoney.uk.co