The geopolitical conflict in the Middle East pushed oil prices sharply higher. Now that the tensions have cooled, the price of oil has fallen back to its levels prior to the conflict. Major oil companies, like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), have warned that oil prices aren’t reflecting industry fundamentals. So oil prices could move higher again.
But the big lesson from this event isn’t that investors should try to time energy markets. The lesson is that oil and natural gas are vital for the normal functioning of the world economy. Because of that, most investors should have some exposure to the sector. Here’s what you need to know and why Exxon and Chevron are great energy stocks to buy even as oil prices come back down.
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Image source: Getty Images. The world still needs oil
For many years, the world has been focused on shifting away from dirtier energy sources and toward cleaner ones. That’s great, but the conflict in the Middle East has made it clear that oil and natural gas remain vitally important. That isn’t likely to change anytime soon, with the most likely energy scenario including more clean energy and at least a similar amount of oil and natural gas, if not a little more. That’s because energy demand is rising as the world gets more digital and more economically developed.
That said, oil and natural gas are highly volatile commodities. The conflict in the Middle East has, again, highlighted this fact. So investors need to take a measured approach to the energy sector. You could buy a pure-play driller like Devon Energy (NYSE: DVN) or Diamondback Energy (NASDAQ: FANG), but these businesses are entirely reliant on the prices of oil and natural gas to support their top and bottom lines.
Devon and Diamondback are both onshore U.S. drillers, which means they don’t have direct geographic exposure to the Middle East. That’s good for their production metrics, but neither one can avoid the impact the Middle East has on commodity prices. Most investors looking for long-term exposure to energy will probably want to look elsewhere.
Exxon and Chevron: Big, strong, and diversified
Exxon and Chevron are two of the world’s largest energy companies. They are integrated, meaning they are exposed to energy production, transportation, and processing. Having diversification across the entire energy value chain helps to soften the peaks and valleys of energy prices, since the sector’s different segments perform differently through the energy cycle.
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