The following is a guest post by Elvie Mason
As the price of oil plunges to its lowest in 12-years, dropping below $27 a barrel at the start of the year, investors are fearing for the stability of their petrol stocks. Although its market has gained some momentum recently, it’s still hasn’t returned to its normal state.
Consumers may have enjoyed the bargains brought about by the low prices of petrol, but is it an indicator that oil stocks will also likely be reduced to bargain prices in the near future? And if so, should we fill our portfolio with petrol investments while it’s at its lowest price point?
Oil stocks that matter
If you are in search of stocks that you can “buy low,” then the petrol sector warrants some attention. Many companies have seen a significant decline and rise in stocks over the past six months, such as:
- Energy Select Sector SPDR – declined about 21%
- S&P 500 – increased by nearly 5%
- Exxon Mobil
- SPDR S&P Oil & Gas Exploration Production ETF – fell by over 41%
While prices still haven’t hit a stable level, now is the time to pick up petrol stocks. Billionaire energy mogul T. Boone Pickens has predicted that oil prices will be close to $80 a barrel by the fourth quarter of this year, as he expects energy companies to drastically cut back on production that will decrease the supply and drive prices higher. By that time, if you get the right stocks, the switch will be fast and expect your portfolio to gain steady momentum this year.
Affecting primary economies
Petrol stocks affect primary economies, from the oil producers down to the countries that economies activitely rely on the performance of oil and gas on the world market. If you follow the recent trends, you will see how top economies have recently struggled to gain economic power as their exchange rate and GDP have shown a spiraling effect due to the lowering price of oil, leading to inflation. Why is that?
For the longest time, petrol has been a basic commodity worldwide, where many countries greatly depend their economic stability on to it. It’s not only the top petroleum producers and exporters that are affected by the price of oil, top economies, such as the United States, have benefitted from the stability of the petrol market, largely influencing their growth and inflation. FXCM said that there’s an evidently a strong connection between America’s GDP and the price of oil in the world market, where the US’ level of gross domestic product saw a 1.4% drop after the Federal Reserve showed a 10% increase in the price of oil in 2014.
The same article added that there is also a strong correlation between crude prices and economic inflation, where rising prices of petrol pushed up core inflation indicators as well as inflation-adjusted bond yields. Thus, understanding the other factors that may affect the price and strength of your stocks, including your economies stability is extremely important.
How to win in this game?
The best way is to determine which are the best opportunities by scouting for companies that are financially robust. Recently, we saw how some oil companies, including Seadrill, have tried eliminating their dividends. It’s a clear sign of financial distress. In contrast, there are also companies (Exxon Mobil, Chevron) that have paid and increased their dividends for over 25 years. Exxon Mobil has yielded 3%, while Chevron has yielded 4%. So, before considering whether to buy shares, make sure that you understand the risk or reward trade-off for each option.
In the end, it’s your decision whether to invest more in petrol stocks when it comes to your portfolio. Take note, however, that when you increase your concentration on any individual sector, you also increase the probability for return and probability for loss – that’s why asset allocation and diversification are important.