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Oil prices have come down recently, partly because of the hubbub over the recent discovery of massive oil reserves deep in the Gulf of Mexico, partly because, so far at least, hurricanes haven't disrupted Gulf oil drilling this year, and partly because geopolitical problems haven't significantly disrupted oil supplies yet.
But the oil-price dip, which has lowered many energy-related stocks, probably indicates a buying opportunity, not the start of a long-term trend.
Why? For starters, Chevron (CVX, news, msgs), which holds a 50% stake in the Gulf find, estimated that the region holds between 3 billion and 15 billion barrels of oil and natural-gas liquids. To put that in perspective, the United States consumes more than 7 billion barrels of crude oil every year. Further, it will take several years before the Gulf field begins producing oil in significant quantities.
In the meantime:
- Demand from emerging economies such as China and India, with huge populations just starting to become affluent enough to afford cars and air-conditioned homes, will continue to expand.
- It's unlikely, even with the Gulf discovery, that new oil reserves will be discovered and brought on line as fast as existing oil fields are depleted.
- If that's not enough, any of the many simmering geopolitical issues could explode tomorrow, cutting oil production.
If you agree, mutual funds may be a better way of riding the long-term uptrend in oil prices than buying individual stocks. When you buy stocks, there's always a chance that you'll pick the one clunker in an otherwise strong sector. With mutual funds, you get the advantage of automatic diversification; one stock won't ruin your returns.
More from MSN Money
Building a list
I used MSN's Deluxe Fund Screener to come up with a list of worthwhile energy fund prospects. First I'll describe my screen, and then I'll give you some tips on how to analyze the candidates.You can use MSN's Investment Category parameter to select funds specializing in more than 50 specific market niches as varied as mid-cap growth, foreign value or short-term bonds. MSN's Specialty-Natural Resources category selects funds focusing on energy stocks (precious-metal funds have their own category).
Screening parameter: Investment Category = Specialty-Natural Resources
The screener listed 134 funds in the Natural Resources category.
There's no point in wasting your time analyzing funds that you can't buy, so we'll eliminate them first.
Some funds feel that they already have as much money as they can wisely invest. So they close the fund to new investors. Thus, there's no point in considering them.
Screening parameter: Closed to New Investors = False
Some funds don't want to waste time dealing with small investors. Instead, they target institutional investors or wealthy individuals. These two search parameters rule out such funds.
Screening parameter: Institutional = False
Screening parameter: Minimum Initial Purchase <= 5,000
These two requirements rule out institutional funds, or those requiring minimum initial purchases higher than $5,000. Most funds with minimums above $5,000 require at least $25,000. So, if you want to invest more than $5,000, increase the minimum limit to $25,000. By the way, funds with high minimums, say $5,000, often allow you to add to your holdings in much smaller increments. For instance, Vanguard Energy (VGENX) requires a $25,000 initial purchase, but then allows you to add in increments as small as $100.
Next, I eliminated load funds. Loads are charges that funds subtract from your investment to pay the broker or investment advisor who recommends the fund. These people deserve to be paid if you take advantage of their advice. But since loads reduce your returns, there's no point in paying them if you're picking funds on your own. Some funds charge loads when you buy (front load), and others when you sell (deferred load).
Screening parameter: Front Load = 0
Screening parameter: Deferred Sales Charge = 0
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