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In July 2023, the United States Energy Information Administration released a report stating that rising demand and production cuts will likely increase global oil prices. Experts predicted that crude oil prices will increase to 84 U.S. dollars (USD) per barrel by 2024.
These significant figures contribute to Crude Oil’s status as one of the most coveted assets in financial markets. If you’re thinking about investing in Crude oil or oil stocks, it’s crucial to stay informed about global news and economic factors that have a significant influence on oil prices.
What are oil stocks? How can fluctuating oil prices affect your investment in these stocks? Do you need to store the physical oil barrels when you buy them?
This article tackles oil investments and how to invest in oil through the stock or commodity markets.
It also discusses managing risk when investing in oil stocks and provides examples of well-known companies you can invest in.
What Is the Price of Oil Right Now?
As of July 12, 2023, the following prices of oil and related commodities are as follows:
- West Texas Intermediate (WTI crude oil): $78.77 per barrel
- Brent crude oil: $82.79 per barrel
- Natural gas: $2.70 per metric million British thermal units (MMBtu)
- Gasoline: $2.85 per gallon
Note that these prices change daily. If you want to know the current, exact prices of oil, consider setting up an account with a broker who focuses on oil stocks and commodities. And make sure to stay informed about the latest global economic news for accurate pricing updates.
How to Invest in Oil Stocks
You can invest in oil stocks through futures, options, and spot markets.
Suppose you buy crude oil from the spot market. You must have significant capital and sufficient storage facilities to accommodate shipments of thousands of oil barrels from a tanker or pipeline.
If you have no capital or space to store the oil barrels, your other alternative is investing through oil futures or options.
Futures are financial contracts that require you to sell or buy a security at a specific future date and price. Meanwhile, an option gives you the right, not the obligation, to sell or buy the underlying security at a set price on or before a specific date.
To engage in futures trading with an online broker, you are required to open a margin account and deposit sufficient funds to cover your investment.
Drilling Down Into Investing in Oil Stocks
Oil stock investing involves more than just spending money to buy such stocks. The following sections discuss essential things you must also consider to help improve your strategy in oil investment.
Keep an Eye on Oil Prices
Crude oil price is one of the most significant factors affecting the oil industry. Oil stock prices tend to go up when crude oil prices rise, but when crude oil prices fall, so will the prices of several oil and gas stocks.
Oil production involves several costs, including drilling, transportation, storage, and refinement expenses.
When an oil company sells a barrel of crude oil at a higher price than these costs per barrel, it makes money. However, the company can lose money when oil trades at a lower price.
When considering investing in oil stocks, it’s important to assess the market conditions carefully. Typically, it can be advantageous to purchase these stocks when oil or energy prices are relatively lower rather than during periods of high prices. This approach may provide opportunities for potential profit if prices increase in the future. However, it’s essential to conduct thorough research and consider various factors before making investment decisions.
Know the Differences Among Oil Stocks
Despite belonging to the same industry, oil companies may operate in different parts of this sector. Prior to buying oil stocks, consider researching the type of oil company you plan to invest in.
Oil stocks can belong to any of the following categories:
- Upstream oil and gas companies: These companies, also called exploration and production (E&P) companies, explore potential oil locations and, upon discovery, drill wells to extract the oil from under the ground or seafloor.
- Midstream companies: These companies transport, process, and store crude oil, natural gas liquids (NGLs), and refined petroleum products.
Many midstream companies use long-term, fixed-rate, or take-or-pay contracts to help manage the effect of oil and gas price fluctuations on their profitability.
Take-or-pay contracts require the buyer to take a specific amount of goods from the seller or pay a penalty.
- Downstream companies: These businesses refine crude oil into products like petrochemicals or fuel, sell these products to consumers, or both.
Examples of such companies are gas stations and oil refineries.
- Integrated companies: These companies operate in more than one of the abovementioned segments.
- Oilfield services companies: These entities provide upstream companies with operational support, equipment, and other services.
These services include offshore or onshore drilling rigs, drill bits, pressure valves, and subsea robots.
- Oil exchange-traded funds (oil ETFs): These assets let you invest in an oil industry subsector rather than a single oil company. ETFs consist of stocks that are usually traded like ordinary stocks.
Focus on the Dividend
You can choose dividend investing if you’re a long-term investor who does not want to monitor the oil markets constantly.
Dividends are a form of payout, usually in cash, that a company gives quarterly or yearly to its investors.
Some integrated oil companies like Chevron and ExxonMobil tend to increase their dividends annually. Many midstream companies also offer high dividend yields and reliable payouts.
Know When to Invest in Oil Stocks
As an investor, you must be aware of the oil sector’s volatility (the rate at which the prices increase or decrease over a specific period) and focus on companies that can weather the industry’s downturns.
In such cases, a commonly-followed approach is investing in companies with relative price fluctuation immunity. These companies include integrated oil giants and E&Ps with significantly low production costs.
You could also consider midstream companies as they are likely to survive adverse market conditions easier than others in the supply chain.
Risk Management Is the Key to Investing in the Oil Patch
The oil market can be susceptible to slight supply and demand imbalances that can cause significant price fluctuations. For example, the 2020 COVID-19 pandemic saw the sector’s prices go out of control.
Oil prices can also reach record highs when demand increases despite a supply shortage. One such case was in early 2022, when crude oil prices surged partly due to supply threats after Russia invaded Ukraine.
In such situations, it’s essential to exercise caution when choosing oil stocks for investment, bearing in mind that certainty in the markets is never guaranteed. Market conditions can take unexpected turns, and it’s always crucial to conduct thorough research and implement effective risk management strategies. Prioritize companies with strong financial foundations that can withstand adverse events, but remember that even the most promising investments carry inherent uncertainties.
Oil Investment Crunch
Exploration and extraction companies typically remain highly profitable even when oil prices are relatively low. However, these companies can reduce their investment in the industry if they think the future is less favourable.
Since 2014, capital expenditure and oil reserve replacement have been dropping, with oil field production and the number of oil wells declining and reserves rapidly depleting.
Furthermore, the COVID-19 pandemic has worsened the investment decline, and the Biden administration’s drilling ban on federal land in the United States signals a shift in the U.S. government’s sentiment against the oil industry.
In the face of these events, some producers have adopted a more cautious oil investment posture, leading to less cash flow for investment spending.
Amid this investment crunch, the Organization of the Petroleum Exporting Countries (OPEC) will likely increase its production requirement to counter the pressure on prices.
Furthermore, it’s important to factor in the long-term implications of climate change on the oil and gas industry. The energy sector is currently in the process of transitioning towards renewable energy sources.
How to Analyse Oil Stocks
A robust economy can help support oil producer profitability and rising oil prices. However, capital allocation and geopolitics can play crucial roles in the industry.
Given how volatile oil prices are, oil companies must have three essential characteristics to survive any industry downturn:
- A robust financial profile with an investment-grade bond rating: An investment-grade rating indicates that a corporate or municipal bond has a relatively low default risk (stoppage of debt payments). For example, an “AAA” rating indicates high credit quality.
- Low operating costs or relatively stable cash flow: Low operating costs can allow E&P companies to sustain operations profitably even when oil prices drop.
Downstream companies should also maintain operating costs below the industry average.
Meanwhile, midstream companies can earn more than 85% of their cash flow from steady revenue sources.
- Diversification: Oil companies should consider operating in more than one geographical location or vertically integrating (owning two or more supply chain processes) by engaging in several different activities.
The Debate Over Peak Demand
Several major oil market players argue that global oil demand peaked in 2019 at about 100 million barrels daily and that this peak will not happen again due to structural changes caused by the pandemic.
This view on the global economy appears to hold ground based on the sharp oil consumption reduction for transportation. After travellers started cancelling flying plans in March 2020, jet fuel consumption dropped and only gradually increased as authorities lifted travel restrictions.
Although oil consumption continues improving, recovery appears to be lower than before the pandemic, which was the peak period.
Still, rising living standards and a growing middle class in Asian countries like India and China may increase demand for more cars and air travel.
Even when economic growth slows, the large number of people entering a higher income threshold may enable them to afford a vehicle to support travel demand.
Technology and Its Consequences
Technological innovation can lead to significant changes that can affect investments in the oil industry. For example, carmakers planning to replace internal combustion engine (ICE) vehicles with those that run on electricity may discourage oil investments in favour of this new technology.
This development may prompt traditional car manufacturers to shift to electric vehicle production. Such events have triggered massive research and development efforts on electric vehicles by companies seeking to grab market shares in this industry.
Furthermore, mass manufacturing can make electric car prices more attractive, and an oil price spike may hasten the conversion to electric vehicles.
What Are the Top Oil Stocks to Invest in?
If you plan to invest in oil stocks, make sure to thoroughly research the companies you are looking to invest in and determine whether they are suitable for your investment goals.
For example, you may choose an oil stock owned by a big oil company that pays dividends.
The following sections offer a list of prominent oil companies as examples. It’s essential to recognise that the financial markets encompass a diverse array of companies beyond these examples, so you may want to explore a wider range when formulating your trading strategy.
ConocoPhillips
ConocoPhillips is among the largest E&P-focused companies worldwide. It specialises in locating and producing oil and natural gas and operates in over a dozen countries.
This company has access to some of the world’s low-cost oil, including oil from the Permian Basin.
This basin is a large sedimentary region in southeastern New Mexico and western Texas in the U.S. It is known for natural gas and petroleum deposits.
With access to cheap resources and average costs of around $40 per barrel, ConocoPhillips can profit from almost any oil market environment, enabling the company to generate substantial cash flow.
Devon Energy
Devon Energy is a U.S. E&P company with diversified operations throughout several low-cost, oil-rich basins that allow the company to generate plenty of cash.
Devon Energy pays investors as much as 50% of its excess cash flow quarterly through variable dividend payments after funding its capital expenses and fixed base dividend. Devon uses the remaining extra cash to repurchase shares and improve its balance sheet.
Enbridge
Enbridge operates one of the world’s largest oil pipeline systems and transports 30% of North America’s oil. The company also has a natural gas utility business, renewable energy operations, and a vast natural gas pipeline system.
Enbridge’s pipeline operations help the company generate stable cash flow backed by government-regulated rates and long-term contracts. These sources give Enbridge sufficient cash to pay high-yield dividends and invest in energy infrastructure operations.
ExxonMobil
ExxonMobil is a fully integrated oil major that operates in all oil and gas industry segments, including petrochemical manufacturing (involving petroleum-derived chemicals) and marketing petroleum products.
The company’s investment efforts in boosting efficiency and reducing business costs have started paying off in 2022.
ExxonMobil has also significantly reduced its oil production costs by focusing on high-return assets, enabling it to generate significant cash flow despite higher oil prices.
Phillips 66
Phillips 66 is among the leading oil refining companies in the U.S. and Europe. Thanks to its large-scale, vertically integrated operations, the company has become one of the industry’s lowest-cost refiners.
Phillips 66’s marketing and specialities business distributes refined products and manufactures specialised products like lubricants. Phillips 66 has investments in petrochemicals and midstream operations through its joint venture with Chevron.
5 Stocks to Consider for Your Investment Portfolio
If you’re an investor seeking to explore opportunities in oil stocks and have reached an informed decision, take a closer look at the five companies discussed in this article. Once you’ve pinpointed a specific stock that aligns with your investment goals, begin crafting your trading strategy.
It’s important to note that senior investors may face challenges in recovering from financial setbacks if their investments don’t perform well. Therefore, consider adopting a conservative investment approach to help manage such setbacks. For instance, you might want to focus on relatively stable, low-risk stocks with reliable cash flows and higher dividend yields.
Oil Stock FAQs
- What is the price of one barrel of oil?
As of July 12, 2023, Brent crude oil costs $82.79 per barrel, while WTI crude oil costs $78.77 per barrel. Prices change daily, so sign up with an online broker and keep up with the global economic news to receive the latest oil prices.
- Are oil and gas companies a good investment?
Oil and gas companies can be an excellent investment if you understand the benefits and risks associated with them and their industry.
By formulating robust investment strategies and effectively mitigating risks, you can aim for favorable outcomes while prudently managing potential downturns.
- Should I invest in oil and gas companies now?
The recovery in global oil demand and tightening supply after the COVID-19 pandemic may favour many oil and gas companies. However, market conditions can change quickly and affect your decision to invest in such companies.
If you still want to invest in oil stocks, you could consider focusing on high-quality, integrated oil companies, such as the ones mentioned in this article.
- What is the future oil price?
In July 2023, experts predicted next year’s crude oil prices to reach $84 per barrel.
However, it’s crucial to acknowledge that the markets are in a constant state of flux, influenced by a myriad of factors that can lead to price fluctuations. This underscores the dynamic and unpredictable nature of financial markets.
- What is the Brent oil price today?
As of July 12, 2023, Brent crude oil has the following prices:
- Open (opening price): $80.95
- Close (closing price): $81.07
- High (the highest traded price of the day): $82.73
- Low (the lowest traded price of the day): $80.42
References
- Global oil markets
https://www.eia.gov/outlooks/steo/report/global_oil.php
- How to Invest in Oil
https://www.investopedia.com/ask/answers/08/oil-as-investment.asp
- Futures in Stock Market: Definition, Example, and How to Trade
https://www.investopedia.com/terms/f/futures.asp
- Essential Options Trading Guide
https://www.investopedia.com/options-basics-tutorial-4583012
- Take or Pay: What It Means and How It Works in Contracts
https://www.investopedia.com/terms/t/takeorpay.asp
- Is Dividend Investing a Good Strategy?
https://www.investopedia.com/articles/basics/11/due-dilligence-on-dividends.asp
- End of the Line
https://www.imf.org/external/pubs/ft/fandd/2021/06/the-future-of-oil-arezki-and-nysveen.htm
- Investment Grade Credit Rating Details: What Does It Mean?
https://www.investopedia.com/terms/i/investmentgrade.asp
- Permian Basin
