Oil has dominated headlines during the coronavirus crisis, but not for reasons investors typically welcome. International events that disrupt the safe transport of natural resources add to the sector’s inherent volatility, as supply and demand constantly shift. Understanding oil assets, their impact on portfolios, and petroleum’s persistent influence on the financial markets is essential.
Despite these challenges, the oil market remains a relatively stable long‑term holding. Growth potential persists, and the sector deserves attention even as renewable energy gains global traction.
Quick Look at the Best Oil Stocks
Overview: Oil Stocks
Major firms such as ExxonMobil and BP are among the oldest and largest publicly traded companies in petroleum, but many other players handle crude and a wide range of petroleum products.
Despite environmental headwinds, the oil and gas industry remains a multi‑trillion‑dollar business composed of several subsectors and business models. Companies are generally categorized into three groups based on their position in the value chain:
- Upstream: These firms locate and extract oil and gas. They explore new reservoirs, develop drill sites, and generate revenue primarily from extraction rather than sales. Upstream operations require substantial capital for drilling and fracking equipment, creating significant financial risk. Examples include Occidental Petroleum (NYSE: OXY) and Whiting Petroleum (NYSE: WLL), which have recently faced debt challenges.
- Midstream: Midstream companies transport, store, and process raw products. They operate pipelines, tankers, and storage facilities that link producers with refiners and end users.
- Downstream: Downstream firms refine crude into gasoline, diesel, jet fuel, lubricants, and other products. Many also own midstream assets, allowing them to control inventory and distribution.
Integrated majors like ExxonMobil operate across upstream, midstream, and downstream, making their stock prices sensitive to OPEC decisions, geopolitical events, and seasonal demand fluctuations. When evaluating oil stocks, consider which segment the company occupies, as this influences its ability to adapt to market shifts.
Choosing a Broker for Oil Stocks
Before investing, select a brokerage that offers low‑cost access to oil‑related equities and ETFs. Most major discount brokers now provide commission‑free trades and have no account minimums, eliminating the flat‑fee structures of the past.
Key Attributes of Strong Oil Stocks
- Manageable debt load: High leverage is common, especially for upstream firms that require expensive equipment. Companies that can service their debt are better positioned to weather price volatility.
- Stable dividend: Historically, oil stocks have offered attractive dividends, but recent market pressures have led to cuts. Evaluate the sustainability of payouts rather than chasing high yields.
- Robust cash reserves: Sufficient liquidity enables firms to fund capital expenditures, navigate regulatory changes, and respond to downturns.
Additional Considerations
When investing in the broader oil sector, keep an eye on the following factors:
- Geopolitical risk: Political instability, sanctions, and OPEC policy shifts can quickly affect supply and pricing.
- Market dynamics: Demand trends, inventory levels, and global economic conditions drive price movements.
- Health and safety regulations: Safety incidents can trigger tighter oversight and impact production.
- Environmental pressures: Transition to low‑carbon energy sources and climate‑related regulations may affect long‑term profitability.
Trading Oil Stocks in a Price War
Investing in oil can be challenging. Price volatility, combined with short‑ and long‑term headwinds, creates uncertainty. While cheap oil may boost demand temporarily, capital‑intensive upstream firms often struggle during prolonged downturns.
Nevertheless, quality companies can present attractive opportunities when prices dip to historic lows. Over the long run, crude prices tend to rise, driven by global demand and strategic reserve considerations. Conduct thorough research and assess each company’s fundamentals before committing capital.
Frequently Asked Questions
Are oil stocks profitable?
Oil has historically been a store of wealth, with prices generally trending upward over time. However, all investments carry risk, and each stock should be evaluated on its own merits.
Are all oil stocks the same?
No. Oil stocks represent a range of activities, including exploration, production, refining, distribution, and various ancillary services.
Can you diversify with oil stocks?
Yes. Investors can diversify both within the oil sector—by holding a mix of upstream, midstream, and downstream firms—and across broader asset classes.