SHOULD YOU INVEST IN OIL STOCKS NOW?

The price of crude oil has recovered most of the losses experienced in late 2018, leaving both West Texas Crude and Brent Crude trading in the mid to high $50 range. This is still well off the $100 level we saw earlier in the decade, but also higher than the $40 support zone.

So, should you invest in oil stocks now? It does appear the oil price is recovering, but there are still risks. If all else remains equal, the price shouldn’t fall too much, while it’s quite possible that it may head back to $100 in the next few years. Investing in oil stocks is still a little risky, but the potential upside should outweigh the risks.

The supply and demand cycle

Like any commodity, the price of oil depends on supply and demand.
Over time, while the global economy is growing, demand increases. Various forms of renewable energy are meeting some new demand. For now, this is a minor consideration, but it will increase with time.

When oil prices rise, new investments in exploration and extraction are made. Supply then increases until it outstrips demand at which point prices begin to fall again. If the price falls a lot, producers with high production costs may cease producing. This leads to falling supply, and eventually, the price begins to increase again.

This cycle is also affected by inventory levels, new discoveries and geopolitical issues which can cause supply shocks. This is the reason the factors that affect the oil industry are so dynamic.

Risks to investing in oil stocks

Chasing the stocks with the highest dividend yields is a mistake many investors make when choosing oil stocks to invest in. If it turns out that the company cannot afford to keep paying that dividend, the stock price will plummet. Dividends are great, but you need to make sure the yield is sustainable for the company, particularly if the oil price falls.

The price of oil stocks usually reflects the market’s assumptions about the future direction of the oil price. If anything changes suddenly, stock prices will adjust to affect new assumptions. Anything that may affect either supply or demand can affect stock prices.

An unfortunate reality in the oil extraction industry is that oil spills and other disasters do sometimes occur. These can have a catastrophic effect on a company’s oil stock. This is why investors should always diversify across a handful of oil producers.

When to buy oil stocks

When oil prices rise, the more marginal producers engaged in oil and gas extraction gain the most. Obviously, these companies also have the most to lose when oil and gas prices fall.

When prices fall, most energy stocks suffer, but some are more resilient than others. Producers with low production costs can carry on producing profitably. They can even benefit when marginal producers cease production. Diversified producers are also more resilient as they earn margins throughout the supply chain.

When oil prices are relatively high, its best to stick with the diversified producers which are more resilient. If prices fall to historically low levels and then begin recovering, you can consider the high-cost producers which have the most to gain.

Oil stocks to watch

The following US oil stocks are all listed on the One Financial CFD trading platform and are worth watching over the next few months.

Diamondback Energy Inc. (Fang) explores and develops both oil and gas reserves in the Permian Basin. This is one of the riskier stocks in the sector, but the price has fallen 25% in 2019 so there is less risk than there was a year ago. The company has cut costs and is increasing its production levels. It is well-positioned if oil and gas prices remain stable or rise and sell-side analysts are very bullish on the stock.

EOG Resources Inc. (EOG) operates in the US, Canada, and China. The company has generated enough cash to invest heavily in capacity, pay off debt and still pay a dividend. EOG now produces close to 500,000 barrels of oil a day. This stock does need higher prices to justify the stock price but will rise quickly if the oil price rallies.

Exxon Mobile (XOM) is the largest oil producer in the US. The company is also more defensive and can tolerate lower prices better than most. Exxon has a strong pipeline of new projects coming on stream which means it production will continue to grow in the future. Exxon also has a 5% dividend yield with enough cash flow to cover its yield.

Cimarex Energy Co. (XEC) is a smaller producer with a market value of just $4.6 billion. It operates in Texas, Oklahoma, and New Mexico where it explores and extracts oil and gas. It has new production coming onstream soon and should perform well in 2020. Because of its size, Cimarex is also viewed as a buyout target.

Of course, oil stocks are not the only way to play the energy market. You can also trade both oil and gas directly with CFDs on the One Financial Platform.

Begin trading today! Create an account by completing our form

Privacy Notice

At One Financial Markets we are committed to safeguarding your privacy.

Please see our Privacy Policy for details about what information is collected from you and why it is collected. We do not sell your information or use it other than as described in the Policy.

Please note that it is in our legitimate business interest to send you certain marketing emails from time to time. However, if you would prefer not to receive these you can opt-out by ticking the box below.

Alternatively, you can use the unsubscribe link at the bottom of the Demo account confirmation email or any subsequent emails we send.

By completing the form and downloading the platform you agree with the use of your personal information as detailed in the Policy.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Back to top

Office network
  • London Office
    One Financial Markets
     

    Level 2
    36-38 Leadenhall Street
    London
    EC3A 1AT
    United Kingdom


    T: + 44 ( 0 ) 203 857 2000
    E: info@ofmarkets.com
  • Kuwait Office
    VI Markets 
    Sharq - Mazaya Tower 02 - 10th floor 
    PO BOX 3040
    22031
    Salmiya, Kuwait   

    T:
    + 965 22256988
    E: info@vimarkets.com.kw
  • Dubai Office
    One Financial Markets 

    Office 1404
    Ubora Tower
    Business Bay
    P.O. Box 31482 Dubai
    United Arab Emirates


    T:
     +971 4 4531200
    E: info@ofmarkets.com

One Financial Markets is the trading name of C B Financial Services Ltd, a company registered in England with company number 6050593. C B Financial Services Ltd is authorised and regulated by the Financial Conduct Authority in the UK (under firm reference number 466201) and the Financial Sector Conduct Authority in South Africa (with FSP number 45784).

The information on this site is not directed at residents of the United States, Belgium, Poland or any particular country outside the UK and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

www.onefinancialmarkets.com is owned and operated by C B Financial Services Ltd.

Award winning broker
We have been presented with a number of awards that recognise the quality of our service and dedication to our clients :

Best FSA Regulated Broker
Saudi Money Expo

Best Education Product
Saudi Money Expo

Best Broker - Online Trading
IAIR Awards

Best Institutional Broker
Saudi Money Expo

Best FX Services Broker
CN Forex

Top International
FX Broker 2015

Saudi Money Expo

Broker of the Year
Online Trading – Middle East

IAIR Awards

Best Forex
Customer Service 2018

JFEX Awards

We accept the following payment methods: