Berlins Today
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.
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-demand balance. This leads to oil prices moving higher and lower, often dramatically and rapidly.
The current volatility in oil prices is normal for the energy sector. However, oil remains vital for the modern world, as seen in the current conflict, where countries and companies are drawing down oil stockpiles to avoid economic disruption. This effort may help keep oil prices lower than they otherwise would be.
Chevron (CVX) and ExxonMobil (XOM), two of the world's largest energy companies, have warned that oil prices may not fully reflect the on-the-ground situation. Higher oil prices could be on the horizon. Long-term investors should consider oil exposure, but they should focus on companies that can survive through the entire energy cycle. Both Chevron and Exxon have strong balance sheets, with debt-to-equity ratios of 0.2x and 0.16x, respectively. This allows them to manage debt during downturns and maintain dividends. Exxon has increased its dividend for 43 years, while Chevron’s streak is 38 years. Exxon’s dividend yield is 2.5%, and Chevron’s is 3.3%.
For income-focused investors, Chevron may be preferable due to its higher yield. However, both companies are currently priced high, with yields relatively low. History suggests another energy downturn is likely, making these stocks potentially attractive at lower prices with higher yields. The best time to buy energy stocks like Exxon and Chevron is when short-term investors are selling indiscriminately.
Source: The Motley Fool
