Investing in the oil and gas industry carries a number of significant risks. Three of those risks are commodity price volatility risk, cutting of dividend payments for those companies that pay them, and the possibility of an oil spill or another accident during the production of oil or natural gas. However, long-term investments in oil and gas companies can also be highly profitable. Investors should fully grasp the risks before making investments in the sector.
Key Takeaways
The oil and gas sector is an attractive sector for both day traders and long-term investors.
The sector is an active and liquid market that can also serve as a portfolio diversifier and inflation hedge.
Oil and gas stocks, however, tend to be more volatile than the broader market as they are sensitive to changes in the supply and demand of the underlying commodities.
In addition, oil companies are exposed to legal and regulatory risks that can be the consequence of accidents, such as oil spills.
Price Volatility
The main risk associated with oil and gas investments is price volatility. The supply and demand of oil as well as geopolitical events cause oil and gas prices to fluctuate, impacting the stocks of these companies.
For example, during the COVID pandemic, the price of crude oil dropped substantially in the first quarter of 2020. Oil went from over $138 a barrel in June 2014 to a low of $23 in April 2020. Natural gas followed suit, going from $5.79 per one million British Thermal Units (mmBtu) in June 2014 to around $2.00 per mmBtu as of April 2020, a drop of around 65%.
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Natural gas is notorious for being seasonal and volatile in its price due to greater demand during the winter. However, the drop, caused by the global lockdown and the split between OPEC and OPEC+ over production cuts, plunged prices for fossil fuels to historically low levels.
