How to invest in oil as Iran tensions build

As the year comes to a close, investors are finding themselves in a position they didn't expect: The U.S. economy looks to be growing more than most analysts anticipated. It is hard to say whether that growth will continue to accelerate next year. But signs that the economy may be improving have lifted oil prices already. That's partly because energy companies often lead the way during expansions as more trucks loaded with goods clog the highways and more workers fill up their tanks on the way to work. But don't run out and buy a giant energy company like Exxon Mobil Corp or Chevron Corp just yet. The uncertain dollar, the European Union and declining oil supplies will all likely affect oil prices in 2012. Oil plays in an uncertain world: The price of oil is notoriously hard to predict. Earthquakes, politics, and, increasingly, speculators can affect oil prices without notice. Iran's first vice-president warned on Tuesday that the flow of crude will be stopped from the crucial Strait of Hormuz in the Gulf if foreign sanctions are imposed on its oil exports. -- keeping the oil market on edge. Recent bombings in Iraq, meanwhile, are raising concerns about stability there after the U.S. military withdrawal. Investors do not have to wade too deeply into commodities to capture such gains. The United States Oil ETF tracks oil futures contracts closely. "This fund is an efficient and effective means" to speculate in oil, noted Abraham Bailin, an ETF analyst at Morningstar, although this ETF can generate unwanted tax liabilities. He cited the IPath S&P GSCI Crude Oil Total Return Index ETN as one that with a more straight-forward tax structure. GAS PRICES AND THE U.S. ECONOMY Europe's economic woes could keep a lid on oil prices. Several euro zone countries are expected to slide into recession in 2012. And if one or more countries abandon the European Union's single currency, the euro, the U.S. dollar would likely move higher. Either could cushion the impact of oil prices for U.S. buyers. If a stronger dollar softens the impact of oil prices, companies that focus on the U.S. domestic economy like retailers and car makers ripe for outperformance, she said. Small-cap stocks, which tend to be more immersed in the U.S. domestic market than the large cap companies, would likely benefit most from a dollar's climb, she said. The PowerShares DB US Dollar Bullish ETF, which tracks the performance of the dollar against an index of six currencies, is one ETF option. It is up about 1.5 percent in the past month.