How To Invest In Oil Stocks

Oil stocks such as Exxon Mobil (NYSE:XOM), trade in tandem with crude oil, which trades opposite of the US dollar.

As the dollar rises crude oil falls and vice versa, however the reason why oil companies make more profits when crude oil rises is a no brainer to figure out, they just get more money for what they sell! And their reserves are valued higher!

No one knows which came first, the oil or the USD, it’s almost like the egg and chicken dilemma, sure they both carry a lot of weight and they make the market. So no one cares which one out-weights the other, most likely either one can have the most impact at different times. The bottom line is that when crude and dollar make a clear move, so will oil stocks:

As we mentioned earlier, oil giants such as Exxon Mobil and BP make billions when crude oil price rises. Needless to say that even when crude oil hits $160 these giants make billions not only from own drilled oil, but even from the crude oil they buy from Saudi Arabia and other oil producing countries at predetermined, low prices.

As you can probably tell, to invest in oil stocks is in part like investing in foreign currencies, such as the Euro. There are other factors that influence crude oil price and the value of these oil stocks. The crude oil is a very technical market and is influenced by speculation a lot, so even though its fundamental value at the time of writing this article is around $80, actual price seen on the chart is $70, and it has also traded at well over $140 in recent years.

Therefore, this fundamental value is of no meaning, if you are going to invest in oil stocks, you have to figure out where crude oil is going and if the dollar is cooperating. In the short term the dollar will have a great impact, in the longer term actual technical trend and speculative trading demand – supply determine the trend of crude oil.

Oil companies are a great investment choice, they won’t go out of business when something happens to them, like an accidental oil spill or increased drilling costs. As we mentioned, they can make money even without doing any drilling at all, just by selling oil they buy from other countries.

All being said, one has to be careful so as not to buy oil stocks during a short term top, but rather have a longer term investment plan – to slowly and gradually invest in oil stocks over a safer time frame.

Stock Market Investing Strategies and Market Speculation by..

Scott Smith
Investing The Stock Market © 2008 – 2010

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