Of Mutual Interest: Investors can find energy play tempting but tricky

MANY INVESTORS LIKE to buy what they know. Eat a lot of fast food, the logic goes, buy McDonald's Corp. Know a local department store well -- snap up shares of Macy's Inc. It's trickier, though, when it comes to surging energy prices.

Trying to profit from soaring oil and gas prices can be tempting, but it's not without its pitfalls, with some observers blaming speculators for the stream of records set in the markets for these commodities since Jan. 1.

Most investors who want a piece of the action could invest in stocks of big oil companies, and many already do through investments such as pensions or 401(k) plans. But more daring players might wade into the often frothy waters of the commodities markets themselves, investing in products that tap into futures contracts for crude oil, refined products and natural gas.

Bill Gerlach, portfolio manager for the Nationwide Natural Resources Fund, said that while he doesn't make recommendations on how people invest, he understands the inclination to try to seek some benefit from the higher costs of filling a gas tank.

"We are consumers, so would it makes sense to actually own some personally," he said.

But he cautions that the pullbacks in the volatile energy markets can be punishing.

"This has been the best energy market of my lifetime, and yet we have a correction basically every quarter and a half," Gerlach said. "Since 2004, we've had at least two corrections a year. I'm not talking small corrections. I'm talking 15 percent corrections."

Even with soaring prices, some investments in the sector have come off their highs. In the quarter ended March 31, natural resources funds, which often include investments in the energy sector, saw a negative average return of 4.53 percent, according to fund tracker Lipper Inc.

"A lot of individual investors are interested in whatever has done well recently," said David Kelly, chief market strategist at JPMorgan Funds. But, he said, there is "some dangerous investment interest from the perspective of an individual investor in chasing these oil prices."

Investors need to decide whether they are comfortable with delving into a market that has seen such rapid gains.

"I've been getting quite a few questions from people wondering why the market is so dominated by speculation right now," Kelly said. "Instead of the actual users or producers of oil being the ones making the market, the market seems to be dominated by this sort of Vegas-type mentality."

Those hardest hit by higher energy costs likely don't have spare money to invest. But those with money available should consider the reasons why energy might be a good bet and not simply look at the recent run. Analysts have variously blamed supply disruptions, strained refining capacity, a weaker dollar and speculators for pushing energy prices higher and oil toward $120 per barrel.

But new Energy Department data show that demand for finished petroleum products fell 8.5 percent in February from January while demand for gasoline declined by 6.2 percent.

Kelly noted that oil use isn't surging, although it is expected to increase in coming years with the economic rise of China and India.

"One of the things I think is very important to realize is that the growth in world oil consumption is not that strong. In fact, if you look over the last two years, world oil demand in total barrels has only gone up by about 1 percent per year," Kelly said.