Investing in oil stocks is not an easy decision. The global economy faced one of the largest oil price declines in modern history between mid-2014 and early 2016. The 70 percent price drop during that period was one of the three biggest declines since World War II, and the longest lasting since the supply-driven collapse of 1986.
In view of this, the oil market can be very confusing to both the professional and individual investor, with large price fluctuations sometimes occurring on a daily basis. Let’s take a closer look for better understanding of the oil sector so that investors can make a well-informed decision when investing in oil stocks.
Understanding the oil stocks market
Publicly traded companies that explore, produce, refine and distribute oil and gas are known as oil company stocks. These oil stocks are often involved in three types of activities: midstream (transport and storage), downstream (refining and distribution of petroleum products), and upstream (exploration and drilling).
The prices at which these equities are traded on the stock market are included in the oil stocks list for oil companies. Therefore, a number of factors can have an impact on the price of oil stocks as well as companies that deal in oil and gas. This covers market trends, the company’s financial performance, and potential for future growth.
The world’s petroleum supply and demand are correlated with oil stocks. Oil prices have fluctuated over the past few decades as a result of global occurrences and the need for energy. For example, before the ongoing crisis in Ukraine, the COVID-19 pandemic in 2020 caused a sharp decline in energy consumption and an abrupt drop in oil prices. Furthermore, the global drive to explore alternative energy sources could lower the global oil consumption in the future. On the other hand, the world’s current oil consumption suggests that petroleum will probably be used for many years to come.
How to buy oil stocks?
Investing in oil stocks doesn’t mean purchasing oil or oil-rich land. Buying oil or oil-rich land is not equal to investing in oil stocks. Alternatively, you may purchase stock in companies that deal with oil in some form, such as drilling or petroleum transportation, just like you could purchase stock in a company that provides technology or toothpaste. Any standard stock broker or brokerage account that you may have open will allow you to carry this out.
Since purchasing stocks involves investing in specific companies, research is very important in order to understand any risk. Then, you can use a brokerage account to buy and sell oil stocks when you are ready to invest in an oil company.
Read more | How the stock market works: A beginner’s guide
Types of oil stocks
Here are different types of oil stocks:
Exploration and Manufacturing
The oil exploration and production companies are among the most volatile stocks in the industry, with their prices being highly influenced by short-term market movements. If you invest at the right time or the firm you could make significant discoveries of natural resources, this can work to your advantage. However, dips in the oil market may also reduce the value of oil companies’ stock, making them less able to make a profit on what they pull out of the ground.
Services for oilfields
These companies produce the machinery required in the extremely challenging operation of drilling and oil extraction. This comprises heavy-duty parts, testing and safety instruments, and drilling equipment.
The price of oil can also cause significant fluctuations in the profitability of oilfield services firms. Drilling becomes less lucrative as oil prices decline, and producers are less inclined to invest in services and equipment. Producers may increase their expenditure on oilfield services in an attempt to access more challenging-to-extract deposits if prices rise.
Refining
Facilities run by refining companies transform crude oil into commodities like petrol. These companies can perform excellently under advantageous market circumstances. They can profit from rising oil prices since they have to purchase it well in advance of when they get it, refine it, and then sell it. But same a propensity is reversed when prices decline. Refiners can find that their product prices are lower than their production costs.
Consolidated petroleum firms
Some parts of production, services, and refining are managed internally by integrated oil firms. This might suggest that their risks are dispersed more widely than those companies that focus on a single facet of the oil business. Still, the price of oil might have a significant impact on their prospects.
Tips for investing in oil stocks
Track the movement of oil prices: In general, oil stocks perform better if a barrel of crude oil is more expensive. Oil prices, therefore, have an impact on oil stocks, and investing at a certain price point might be the difference between making a profit and a loss. You will make better gains when you sell oil stocks for a greater price if you had purchased them at cheaper cost.
Understand your investment options: There are several of ways to make investments in oil. Numerous businesses are involved in oil production at every stage due to the complexity of the extraction and usage processes:
- Upstream companies, commonly referred to as exploration and production (E&P) companies, evaluate possible oil fields. New locations, both on land and in the sea, are being drilled for oil. These firms’ stock prices typically have a strong correlation with the price of oil and natural gas.
- Transporting, refining and storing natural gas and petroleum products generates revenue for midstream companies. These companies use contracts to produce revenue, which stabilizes the price of their stock.
- Downstream operations refine oil and sell it – think gas stations and the refineries that supply them. They interact directly with customers. Additionally, downstream companies manufacture frequently required products like fertiliser. Furthermore, petrochemical companies employ natural gas to generate an enormous variety and quantity of polymers.
- Midstream, downstream and E&P activities are combined in integrated companies. Typically, they are huge, global companies.
- E&P firms purchase equipment and operational services from oilfield services companies. For instance, drilling companies buy rigs, tools, and other equipment from oilfield services providers. There are several publicly listed oilfield services firms in addition to drilling companies.
Give dividends priority: There are other ways for investors to make money in the oil sector besides rises in stock prices. Many corporations are returning more cash to shareholders rather than reinvesting in more wells or refiners as a result of the gradual decline in the demand for oil. Therefore, dividend payments from reputable companies are a great alternative for capital gains.
Recognize potential risks: The price of oil has fluctuated greatly during the past few decades. Oil stocks have seen volatility due to the free market’s boom and bust cycles, so the next shift in prices might have a big impact on your investments. Thus, the key to success is doing your homework before making any purchases and identifying objectives, such as selling at a particular stock price or generating dividend income.
Risks of investing in oil stocks
There are several risks that are involved with oil stocks, below are some:
Volatility of market prices
Due to the erratic nature of oil stock prices, it is risky for investors to invest a significant amount of their funds without conducting sufficient research. There are several geographic, political, and economic elements that influence the price volatility of oil firm equities. Whether you are thinking about investing in petroleum or natural gas stocks, you ought to thoroughly research the business and its operations. This might help you understand what to anticipate going forward from the business.
Frauds
There have been several scams in the oil sector in the past. You may have seen stories of people buying stakes in oil companies only to find out later on that the firm was a fraud. Alternatively, their preliminary projects’ forecasts were overstated. Before investing in the stocks, thorough market research on the firm, its offerings, oil wells, and exploration must be done.
Political unpredictability and risk
Natural gas and oil regulations have been influenced by politics. When businesses are doing exploration in unrest-prone areas, the risks rise. Oil firms often invest in stable regimes, but in the end, they have to go where the gas and oil are. Projects can be significantly impacted by a rapid change in government policy or a political turnabout.
Verify that the firm doesn’t operate in nations with unstable dictatorships or a history of abrupt nationalization before investing in oil stocks. The partnerships that an energy company has with foreign oil firms and agencies is something to consider carefully.
Conclusion
Investing in companies that operate in all aspects of the oil sector is possible with oil stocks. You may buy these assets through a brokerage account, regardless of whether you’re interested in drilling or want to diversify your portfolio with an oil ETF. To make money on your investments, though, you have to do your homework. Given the oil market’s renowned volatility, making an ignorant investment is likely to result in financial loss.
Frequently Asked Questions (FAQs)
How can I invest in oil & gas stocks?
You can invest in oil & gas stocks by following these steps:
1. Open an account with a brokerage firm
2. Fund your account
3. Research oil & gas companies and select the ones you want to invest in
4. Buy shares of those companies
Is it a good idea to invest in natural gas and oil shares?
According to experts, investing in natural gas and oil shares can be a good idea due to its long-term growth. However, it is important to do your own research and/or consult a financial advisor before investing.
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