Stocks rise and fall, especially depending on the industry and the macroeconomy. The situations take a turn when unusual circumstances occur against the forecasts and expectations. Such a case exists for oils where the prices are in such a flux that nobody can predict companies’ returns or the futures after the global oil prices change. Investing in a company and becoming a profit and loss stakeholder in that investment requires buying that company’s stocks. When the stocks are made available for investment by an oil company, they are called oil stocks. Those who want to capitalize on the changing oil prices are involved in this investment option. However, the investment in oil stocks has become risky in the past few decades because of the rapid and drastic price change phases in the crude oil market price. Consequently, stocks of the companies that are less risky and more profitable during one period change to risky and non-profitable in the other period, and vice versa. But this risk is mainly caused by the cost of operations instead of the price-stock correlation itself. As the price drops, so does the company margin because of the substantial fixed operating costs.
Over the years, oil prices have been through great flux. This flux is either politically exerted, naturally inflicted (since crude oil is a natural resource), or economically inevitable. In all these cases, the main result is a demand and supply gap due to which the basic supply-demand principle applies and causes the market prices to disrupt the market. Globally, there are three main crude oil markets that govern the global prices:
- Organization of Petroleum Exporting Companies (OPEC) – Governed by crude oil from different countries gathered as a basket
- Brent – UK based
- West Texas Intermediate (WTI) – US-based
These three blocks regulate crude oil prices in different parts of the world and hence set the global criteria for the sale and purchase of petroleum products as well. Investment in oil stocks requires close observation of all these markets as one market often affects the other, causing an overall oil market revolution. During the past 25 years, oil dropped down to below $10 per barrel and rose higher than $140 per barrel (a 14-fold difference) which shows that the oil prices remained highly volatile. However, the position of oil stocks remained strong and surprisingly, it showed a very low correlation with the country’s stock exchange. One of the main reasons for it lies in the fact that the oil market is controlled via oil futures price which is a predicted number rather than the existing one.
Exchange Traded Funds
Exchange Traded Funds (ETFs) are marketable securities that can be bought and sold on a stock market. Though they can represent many industries at a time, an individual can invest in oil stocks by trading in oil industry-specific ETFs. The bright side to the ETFs is their more liquid and profitable nature.
Exchange Traded Notes
Exchange Traded Notes (ETNs) are bonds that cannot be owned by the investors, and they are paid based on the index returns. ETNs are risky since the issuer may get a lower credit rating, thus lowering the value of the ETN. ETNs can be traded on major exchanges.
Investing simply into an oil company can also be performed. However, this option requires thorough knowledge of the company and its competition along with an outlook of the oil market affecting it. For example, Saudi Aramco, Shell, Chevron, Schlumberger, Rosneft, and Halliburton are renowned for their businesses across the globe. However, the investors can invest only in companies listed on their respective stock exchanges.
Conclusion
Investing in the oil market can be risky because of the frequent changes in the supply and demand situation. The price changes involve multiple factors the knowledge of which is essential for a prospective investor. Globally, there are 3 markets that govern the overall oil pricing mechanisms, and their reference prices are considered benchmarks for the entire sector. There are options available for investment in the oil market. ETFs and ETNs prevent the direct impact of the oil market changes to pass on to the investors. The investors can also choose to directly invest in specific oil companies by weighing risks versus profits.
Frequently Asked Questions
Q1: Which major sector do oil stocks belong to?
Answer: Oil stocks are often included in the energy-sector stocks.
Q2: Is it wise to invest in the energy sector?
Answer: As a non-regular and comparatively lower investment as compared to any other investment, it is fine. However, new investors should avoid investment in oil markets before having good intel about the futures price.
Q3: What is the main direct factor that impacts the oil price?
Answer: Supply and demand differences are the main factors that directly impact the oil price.
