5 Reasons to Buy Oil Stocks Now

Advertisement

After hitting a high of about $115 a barrel just a few months ago, crude oil is trading near one-year lows. Oil is down around $80 a barrel as a weakened global economy has put a damper on demand — the 2010 low for crude was around $77 a barrel.

As a result, energy stocks have been held back this year. The broad-based iShares Dow Jones US Energy Sector ETF (NYSE:IYE) is off over 12% year to date, more than twice as bad as the Dow Jones Industrial Average’s nearly 6% decline. While major oil stock Exxon Mobil (NYSE:XOM) has “outperformed” its peers, XOM stock still is in the red since January 2011.

Despite these headwinds, investors with an eye for the long term should seriously consider jumping into the oil sector right now. Macroeconomic trends across the next few years really favor oil stocks as a long-term buy.

Here are five reasons to drill for profits in oil and energy stocks now:

Dividends, Dividends, Dividends

I have been harping on the power of dividend investing for a while as Treasuries offer meager yields and stable income investments continue to outperform the market. The power of a 3%-plus dividend cannot be understated — and such a yield is the norm for many oil stocks. From Big Oil companies like Chevron (NYSE:CVX) that offer 3.5% dividend yields to dividend-rich depletion trusts like the BP Prudhoe Bay Royalty Trust (NYSE:BPT) or the Whiting USA Trust (NYSE:WHX) that offer mammoth but wildly fluctuating dividends, there are a host of great income plays in the energy sector now. And as oil prices climb, those dividends will only get juicer.

Baseline Demand, With Future Growth

Yes, we haven’t seen surging demand for crude. But don’t confuse downward estimate revisions for a falling thirst for oil. The International Energy Agency reports that worldwide demand will rise by 1.2% (to 89.3 million barrels a day) this year and 1.6% (to 90.7 million barrels a day) next year. Yes, a global recession continues to take its toll. But even now demand is increasing. Just imagine what will happen once the economy turns a corner. Even if you believe that’s a year (or two or three) down the road, the baseline demand should give you incentive to buy in now before crude oil consumption jumps.

OPEC Cutting Back

The recent uptick in production from the OPEC cartel was just a stopgap measure amid unrest in Libya, according to recent reports. The member states pitched in to help but clearly have no long-term interest in cranking out crude when prices remain at relatively depressed levels compared to $100-plus oil just a few months ago. You can bet that as oil prices continue to languish near one-year lows that the prospect of additional cuts will be weighing on OPEC’s collective mind.

Middle East Unrest Persists

As the spike in oil prices this spring shows, a risk premium has been priced in to oil. Amid the so-called “Arab spring” is a boon for democracy in the Middle East, but you can bet that the push for a Palestinian state and widespread unrest in Libya, Syria, Yemen, Egypt and Tunisia (to name a few countries) is going to have a destabilizing effect on global energy markets. Higher uncertainty means higher crude oil prices.

Weaker Dollar is Inevitable

Most investors should be painfully aware of the inverse relationship between the greenback and oil prices. Simply put, as the dollar goes up in value, the price falls for commodities like crude (oil as well as corn and rolled steel and others). That’s because a stronger dollar can buy “more” of a given commodity like crude at the same price. The strength of the dollar has been a big downward force on crude oil in 2011, but don’t expect that trend to last. Given the free-spending ways and rock-bottom interest rates in America, the relative strength of the dollar will inevitably erode. Yes, the greenback has been desirable lately — but only compared to the train wreck in the euro zone. Simply being the least worst currency is not a ringing endorsement, and a weaker greenback should hit the markets soon and once again drive up crude oil prices.

Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he owned a position in the IYE energy ETF but none of the individual stocks named here. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, https://investorplace.com/2011/09/oil-stocks-exxon-chevron-dividends/.

©2024 InvestorPlace Media, LLC