Brent crude, the global benchmark for oil, started the year at roughly $60 a barrel. Then the geopolitical conflict in the Middle East broke out, pushing crude oil prices to nearly $140 a barrel. After that spike, oil cooled off, losing around half of the gain before shifting higher again. Today, Brent crude is hovering around $95 per barrel.
What lies ahead for oil? In the near-term, the answer will be determined by the ongoing conflict in the Middle East. But if you are a long-term investor, the answer will be more of the same. Here’s why that’s so important to understand when selecting energy stocks to buy and hold.
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Image source: Getty Images. Oil is a commodity and prone to volatility
This is the hard truth about oil prices: oil is a commodity subject to supply and demand. Right now, the price is affected by a geopolitical conflict, but historically, natural disasters, economic swings, industry overinvestment and underinvestment, and energy-industry disasters (oil spills, etc.) have all upended the supply and-demand balance. That, in turn, leads to oil prices moving higher and lower, often in a dramatic and sometimes rapid fashion.
In other words, the current volatility in oil prices is entirely normal for the energy sector. But, at the same time, oil is vital for the normal functioning of the modern world. That is clearly on display in the current conflict, as countries and companies draw down oil stockpiles to avoid economic disruption. That effort could be helping to keep oil prices lower than they otherwise would be, given the oil market’s current fundamentals, for now.
Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM), two of the world’s largest energy companies, have both warned that oil prices may not be fully reflecting the on-the-ground situation in the energy sector. Higher oil prices may be in the cards, if that’s the case. Most long-term investors should probably have some oil exposure, but they should own companies that can survive through the entire energy cycle.
Chevron and Exxon have proven their reliability
Owning large, globally diversified oil giants like Chevron and Exxon is likely to be a great option for most investors. Each company has exposure to the entire energy value chain, which can help to soften the swings in oil prices. Also, both companies have incredibly strong balance sheets, with Chevron’s debt-to-equity ratio at roughly 0.2x and Exxon posting an even more impressive 0.16x. They have stronger balance sheets than any of their closest integrated energy peers.