Crude oil or petroleum is the world's most traded commodity, and high oil prices are not a short-lived shock anomaly, but the only possible economic response to a world where oil demand growth will outstrip supply growth for many years to come.
While oil stocks are almost certainly among the less risky commodities-stock sector today, purchasing stock in an oil company carries the benefits and risks of a non-diversified investment. Shares of individual companies like Chevron or Exxon Mobil will yield dividends if held over time, not a possibility in the oil futures market. But buying shares in a specific company also involves the risks associated with internal company politics, layoffs and machinery. The raw size and scale of oil companies on average dwarfs those in every other commodities sector. The bigger the companies are, the less prone they are to sudden up and down movements, but even big companies are not immune to major stock declines. When companies get too pricey relative to their earnings, an adjustment lower is inevitable. The most important attribute of the oil stocks is not their size but their valuations. Today oil stocks are the biggest bargains relative to their earning in the entire stock market.
One of the biggest advantages of investing in an oil stock versus purchasing futures is the potential to earn income through dividends. Rather than carrying cost or sacrificing interest, large oil corporations can pay upwards of five percent.
For long term investments in oil this makes a large impact on the return on investment.An alternative to individual stocks, but still traded on the stock market, indexes such as the XLE can offer multiple advantages to traders.
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First, there is a diversified basket of energy producers and service stocks, so a trade is not based on a single underlying price movement.
Next, profits are highly leveraged to the price of oil, so earnings will actually grow faster than increases in the price of oil, enhancing the performance of the stock. There’s also the possibility of increasing dividends, contributing to profits for the client.
As demands for oil and gas will increase in the foreseeable future, a wise investing strategy might be to buy shares of oil and gas producers with large reserves in politically stable parts of the world, like the Canada, Australia, U.S. and the North Sea. Oil demand and production are in reasonable balance and the condition should persist for the next year or so. As production increases so will demand, powered by the global economic recovery and China's increasing consumption.
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