3 reasons as to why oil stocks are smart investments

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Alexander Bowring writes: It is true that oil stocks have taken a massive nosedive. In fact, the crash that caused the downturn was so seismic that it obliterated more than $1 trillion from portfolios since late 2014. You wouldn’t be wrong to be hesitant about placing your money, and your trust, in oil stocks because of this. You shouldn’t let this keep you from oil stocks though; this article explains the three reasons why they make for smart investments.

Hedging against rising energy prices

Oil stocks prices are dynamic, as they go up and down. Nobody can predict with certainty what will happen to them, and this is a risk to you: energy prices could rise unexpectedly. By investing in companies that will profit from rising oil prices, you’re setting yourself up to profit too, and are thereby protecting yourself from the dangers of oil volatility by hedging.

Collecting a growing income stream

A large part of the attraction of oil stocks is the generous income they seemingly allow for  – and often this is the reason why people are invested in the sector. While, since the oil crash, oil stocks have had to cut investor payouts, most know that oil stock payouts are lucrative. Before the crash, they were issuing billions of dollars to investors each year.

Indeed, not all stocks have gotten rid of dividends. The dividends of both ExxonMobil and Valero Energy, in fact, have actually continually increased during the downturn. For example, Exxon increased by 2.7% earlier in 2015, in a continuation of its reputation of uninterrupted dividends income. Oil stocks, then, represent lucrative opportunities for dividends income.

Benefiting from global energy-demand growth

The pile up of oil in 2014 can be partly attributed to the fact that global growth in oil demand was weaker than expected. Typically, the cure for this is lower prices. Recently revisiting its forecast for the growth of oil demand, the IEA now sees that demand will grow by 1.3 million barrels a day. By 2017, demand is forecasted to average 97.4 million barrels daily.

In spite of efforts to counter global warming, it is expected that the demand for oil will still continue to grow and global growth will continue long into the future, thanks to the fact that emerging-market economies are only now beginning to flourish. Demand for oil will be growing at 0.7% per year by 2040, according to ExxonMobil. Though renewables are forecasted a sizeable demand growth, ultimately demand growth for oil is expected to be much higher thanks to emerging market economies.

Investor takeaway

Of course, the rough patch of the oil industry will inspire you to stay away from it. The reasons this article has outlined as to why this shouldn’t be the case should hopefully be enough to persuade you to stick with oil stocks. Hedge against your future losses with oil stocks, get good dividends from them, and know that the industry isn’t in permanent decline, meaning lots of investment opportunities are at hand.

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Alexander Bowring is a London based writer and a Southampton Solent University Screenwriting graduate. He has worked alongside TV personality and Telegraph feature writer Alison Cork, whilst also having produced content for ITV, This Morning, Canvas8, Who's Jack, Alison at Home, and Bonallack & Bishop Solicitors. Alexander also has a keen interest in investments.

Copyright © 2016 Alexander Bowring- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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