The geopolitical conflict in the Middle East has disrupted global energy markets. As a result, oil prices have moved sharply higher. Some may have been hoping for information that would calm tensions when President Trump addressed the people of the United States at the start of April. However,...
The geopolitical conflict in the Middle East has disrupted global energy markets.
As a result, oil prices have moved sharply higher. Some may have been hoping for information that would calm tensions when President Trump addressed the people of the United States at the start of April.
However, little new information was provided, and oil prices rose the next day. Before you buy an energy stock today, or any day, you need to understand three basic facts about the sector.
When you step back and look at the long-term picture, the current volatility in the energy sector isn't unusual. Oil and natural gas are commodities sensitive to supply and-demand dynamics. The balance is easily disrupted by factors such as geopolitical conflicts, natural disasters, and economic swings.
Dramatic, often swift, price moves higher and lower are fairly common and should be seen as a normal aspect of the industry. Right now, news flow and emotions are the two key forces moving the energy sector.
If you can't stomach a high level of volatility, energy stocks may not be the best investment choice for you. And, equally important, buying energy stocks just because oil prices are on the rise is a mistake if you don't also consider the high likelihood that prices will eventually retreat. When that happens, the prices of energy stocks are likely to fall, too.
The geopolitical conflict in the Middle East has disrupted oil and natural gas supplies. Vital energy infrastructure in the region has been damaged. When the conflict ends, it will take some time for energy markets to get back to normal.
That suggests that high oil prices may linger beyond the end of the conflict. Financial markets can react quickly, but the actual business of moving oil and natural gas around the world is physical and will play out over time.
Given the importance of energy to the world economy, most long-term investors should have some exposure to the sector. The best option for most people is likely to be an integrated energy giant like ExxonMobil (XOM +1.67%) or Chevron (CVX 0.06%). Their businesses span the entire energy value chain, and they have proven over time that they can survive the industry's normal swings.
Notably, Exxon and Chevron have two of the strongest balance sheets among their peers. And both have increased their dividends annually for over a quarter of a century. They are built to survive times like these and reward you well with dividends along the way. Right now, Exxon's yield is 2.5%, and Chevron's is 3.5%.
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