Investing in Oil Stocks

Investing in oil stocks is one of the best things an investor can make, especially considering the value and resilience that oil stocks offer.

This resilience lies in the fact that oil companies maintain large crude oil reserves as well as valuable drilling rights around the world. As crude oil will always be in demand and its price is in a long term up trend, oil companies manage to always pull through hard times and make a profit. As a result their stock prices always recover from their lows, even from lows created by unforeseen events such as accidents at refineries and drilling installations.

Oil stocks tend to be valued in a very solid way, there is no bubble element because crude oil itself is not a bubble commodity. Moreover oil companies are very well run and have invested billions in infrastructure and future fuel technologies. Oil companies are very well structured and well protected against all kinds of risks, so that unlike high technology stocks, oil stocks will always have a strong reason to recover from each and every drop they go through. The only possible long term risk is with crude oil itself, as and when it will become redundant by new energy sources that may provide limitless low cost alternative energy, such as cold fusion. This is the only possible risk to the crude oil industry but even that, if ever discovered, will make its way gradually to the industry giving plenty of time to today’s oil companies to adapt.

Some people invest in oil stocks for the purposes of retirement investing, as they find excellent long term value and high liquidity, should they decide to liquidate their holdings at any time. Oil stocks are also suitable for more complicated ways of investing, including ones that involve short term trading as well. The purpose of short term trading is to catch brief declines (especially declines) on those oil stocks, as they often go into range bound trading for a very long time. Range bound trading or short lived declines may appear discouraging at first, but they are simply seen as new buying opportunities by most investors.

Exxon Mobil Stock and Crude Oil

Exxon Mobil stock (above) and crude oil (below). All oil companies maintain oil reserves, as a result their entire net company value follows the value of crude oil. But also their profitability out of their refinery processes is proportional to the price of oil.

Crude oil itself is a solid commodity which in the current decade is fundamentally valued at around $80. Any dip below $80 is a golden buying opportunity for long term investors, as the precious commodity will surely rise back up sooner or later. Price can drop as a result of oil price wars going on between different producing countries, through increased supply, but there is a fundamental long term demand for crude oil which means two things. First of all crud oil reserves are being depleted all around the world, and all innovative new ways of drilling yield less and less oil. Secondly, there is a lot more oil around the world, but it is at harder to reach places or in more costly to process raw materials such as the oil sands of Canada. Hence not only is demand rising steadily but also production costs are also steadily rising.

Crude oil is also affected by speculative traders themselves, that’s why it’s price can overshoot fundamental value, and we can see oil trading at $150 or even $200 a barrel for brief periods of time. This directly creates huge profitability for oil companies, and as a result their stocks skyrocket. This is where long term oil stock investors have to be careful and use crude oil itself as the barometer for stock price direction. If crude oil rises much too far above its fundamental value it is a good idea to sell these oil stocks, at least for the most part and take profits. There is also the other risk, that of crude oil rising for years on end, without stopping and leaving investors who liquidated early, out of further gains. Therefore a more meticulous investment plan is needed, one that can provide both long term investing as well as short term trading, which is what the more sophisticated investors do.

As far as individual companies go, most oil companies are good, though there are ways to assess the intrinsic value of an oil stock, and find out where that stock stands today relative to its current trading price, from a fundamental perspective. Some investors also monitor closely all these price wars between different producing countries, this is an important factor as well. Beyond these concerns there is no need to perform detailed company specific checks on an oil stock, this is because most oil stocks (the vast majority of them), are influenced by the price of oil more than anything else. Even a big internal pricing issue within an oil company is easily dwarfed by what the price of crude oil does.

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