In the vast landscape of investment opportunities, few areas are as captivating and potentially rewarding as oil and gas stocks. These stocks have always held a magnetic allure for investors, but they also present a unique set of challenges that require a deeper understanding.
Whether you’re a seasoned investor looking to diversify your portfolio or someone new to the world of stocks, this blog post aims to provide you with a thorough introduction to the intricate world of oil and gas stocks.
The oil and gas industry wields significant influence on a global scale, impacting economies, politics, and our everyday lives.
As the driving force behind the world’s energy needs, it’s essential to grasp the essentials of investing in companies engaged in the exploration, production, refining, and distribution of these crucial resources.
In this post, we’ll dive into the core aspects of oil and gas stocks, examining their historical performance, the factors that drive their value, and the strategies that can empower you to make well-informed investment decisions.
Oil and Gas Stocks Performance
Oil and gas stocks tend to blow hot and cold. However, when they are hot, they usually move fast. These stocks often correlate positively to geopolitical tensions. When geopolitical tensions rise, oil and gas prices tend to rise and become volatile.
Due to this volatility, the current list of best performers is not indicative of which stocks will perform well in the future. However, most of the leading oil and gas stocks have remained at the top of the sector for decades.
Like many other industries, larger companies in the oil and gas sector are generally considered less risky. These industry giants, often referred to as “oil supermajors” – ExxonMobil, Royal Dutch Shell, BP, Chevron, and TotalEnergies, each boasting global operations and annual revenues exceeding $100 billion – are unlikely to face bankruptcy anytime soon.
Similarly, sizeable exploration and production (E&P) firms like ConocoPhillips, major pipeline companies such as Kinder Morgan, leading refiners like Phillips 66, and prominent oilfield services companies like Schlumberger are also relatively stable.
In this sector, market capitalization and robust balance sheets play a critical role, as price fluctuations can drive smaller oil and gas companies out of business. For instance, in the aftermath of the 2014 crude oil price crash, many offshore rig operators faced bankruptcy due to diminished demand for their services.
Likewise, during the early stages of the COVID-19 pandemic in 2020, several smaller E&P companies, including Whiting Petroleum and Chesapeake Energy, filed for bankruptcy due to the sharp decline in fuel demand.
While larger oil and gas companies are typically more resilient in terms of financial stability, it’s important to note that their continued operation doesn’t guarantee strong stock performance in the future. Size and stability may provide some security, but various factors can influence a company’s stock performance down the road.
Current Oil and Gas Market
Oil and gas prices have been rising, which has caused energy stocks to outperform the market in Q3 2023. Currently, less than 15% of the energy is undervalued, which shows that investors are predicting higher oil and gas prices for the long term.
Natural gas prices have risen in the US, Asia, and Europe by 35%, 45%, and 28% respectively. Investors are keeping a close eye on the Australian LNG strikers, US LNG supply disruptions, and the possibility of an exceptionally cold winter in Europe.
Oil prices have risen 20% (WTI) and 27% (Brent) since the last quarter. The rise was driven by actions of Russian and Saudi Arabia to tighten the markets. Russia and Saudi Arabia decided to make monthly cuts of 300K bpd and 1 million bpd, respectively, for 2023. The cuts were first implemented in June, which has led to a supply deficit of 2.3 million bpd for Q3 2023. Inventory is currently below five-year averages.
Top Five Energy Stocks of 2023
As of October 2023, these were the top five best-performing stocks:
- Marathon Petroleum (NYSE: $MPC) – 30.0%
- EQT (NYSE: $EQT) – 20.0%
- Baker Hughes (NASDAQ: $BKR) – 19.6%
- Targa Resources (NYSE: $TRGP) – 16.6%
- Phillips 66 (NYSE: $PSX) – 15.4%
Investing in Energy Stocks
In the energy sector, investing in individual stocks can be complex. You have to understand industry dynamics and the specific exposure each company has. With enough research and time, investing in individual energy stocks can be rewarding. If you want to avoid volatility, a better strategy would be to use index funds based on the energy sector. Index funds do not try to beat the market. Instead, they try to get a weighted average return for holdings. Another option is energy-focused mutual funds. You will get the upside of energy stocks without the inherent risk.
Proceed With Caution
Oil and gas stocks can be rewarding. However, you must always proceed with caution. Understand the trends, history, and key drivers. Always evaluate your investment goals and risk appetite, and seek professional advice where necessary.
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