Crude oil prices are up nearly 4.5% in mid-day trading after a weekend in which a war has broken out between Hamas and Israel. At this point, most analysts believe the effect on oil prices may be limited to this initial spike.
However, as Ed Yardani of Yardani Research said in an interview with Fortune, that outlook will likely change if the conflict escalates, particularly if other nations are drawn into the conflict:
"Geopolitical crises in the Middle East have usually caused oil prices to rise and stock prices to fall...Much will depend on whether the crisis turns out to be another short-term flare-up or something much bigger like a war between Israel and Iran."
One key takeaway for investors is that oil prices didn't need another catalyst to keep moving higher. Oil stocks were already rising due to a supply-demand imbalance. However, this past weekend's news is a reminder that geopolitical events, particularly as they relate to the Middle East, can have a significant impact on your portfolio.
So How Do You Invest Now?
Oil prices had been on a downtrend in the last week of September. However, even before the recent geopolitical developments, many analysts were calling $80 the new floor for oil in the short term. So if you've already been investing in oil stocks, you can just continue doing what you’ve been doing. But if you haven't, now may be a good time to start considering investing in the sector.
One area to look at is upstream companies. This basically means companies involved in getting oil out of the ground. As such, they will be the ones that will be relied on heavily if countries need to find more supply. And one way to invest in the upstream oil sector is through integrated oil companies. These companies have business operations in every stage of oil production.
With that in mind, here are three picks to consider to manage the current volatility in the oil markets.
Exxon Mobil Lets You Invest in a Best-in-Class Oil Stock
ExxonMobil, Inc. (NYSE: XOM) is an example of investing in a best-in-class oil stock. Even before the recent development, there were many reasons to believe that XOM stock was on its way to new highs. Revenue and earnings were down in the first half of 2023 as oil prices fell from their 2022 highs. However, that trend will likely reverse itself and ExxonMobil will be one of the biggest beneficiaries.
The company has an attractive forward P/E ratio of just 11x earnings. Its dividend currently yields 3.28%, and the company has increased its dividend in the last 40 years. And the Exxon Mobil analyst ratings on MarketBeat give the stock a Moderate Buy rating with a 12% upside. XOM stock is also one of the largest holdings in the Energy Select Sector SPDR Fund (NYSE: XLE).
TotalEnergies SE Provides Heavy International Exposure
TotalEnergies SE (NYSE: TTE) is another integrated oil company. One distinction is that the company is headquartered in France. As you would expect, much of its operations are in Europe. However, it also has North American operations.
The company hosted its annual Investor Day in September. The company forecast a $10 billion increase in cash flow from operations from its 2021 level through 2028. It also reiterated its commitment to pay out "at least 40%" of its cash flow from operations (CFFO) to shareholders in the form of buybacks and dividends.
TTE stock has been trading above its 100- and 200-day simple moving average since August 2023. After gaining 27% in the last year, the TotalEnergies analyst ratings on MarketBeat suggest the stock may be at a top. Some of that is likely due to short interest climbing in the last month.
Energy Select Sector SPDR Fund is the Choice for Broad Exposure
The Energy Select Sector SPRD Fund (NYSEARCA: XLE) is a good choice for investors seeking broad exposure to the oil sector. It covers a range of companies, including oil services companies like the Halliburton Company (NYSE: HAL) and Schlumberger (NYSE: SLB).
On the plus side, the fund has over $37 billion of assets under management (AUM) and an attractive expense ratio of just 0.10%. However, the fund is up just 8% in the last 12 months and just 1.6% in 2023. The takeaway is that the fund is doing what it's designed to do, but investors may do better by investing directly in some of the fund's individual stocks.
