The energy sector stock market has a lot of investment opportunities, which include oil and natural gas. However, oil stock investment can be a tricky ordeal. Despite the growing use of renewable energy, there is still a stable and rising demand for oil and natural gas. Most countries highly depend on petroleum for their daily businesses.
Investors must know the rewards and risks involved in oil company stock investment to help you decide on what portfolio to invest in. This is because oil prices are highly volatileBelow are some of the risks and rewards of oil company stocks investment
Risks
Political Instability
Politics tend to have a regulatory force as far as oil, and natural gas is involved. Risks increase if the company is working on exploration in unstable regions. Oil companies usually invest in stable countries, but they ultimately go where there are oil and natural gas. Sudden political unrest and changes in government policies can impact projects significantly.
The company whose stock you intend to invest in should operate in a country with no unstable dictatorships or sudden nationalization history of sudden. Consider the partnerships the company has with international oil agencies.
Oil Spills and Fire Accidents
Fire accidents and oil spills on exploration sites can make the stock prices crash. For instance, the deep ocean exploration site witnessed the worst oil spill and fire accident at the Gulf of Mexico. The incident led to the death of eleven people and the spillage of 5 billion oil barrels. The company stock prices also plunged, and as a result, investors suffered significant losses.
Fraud
Many frauds have happened in the past within the oil industry. There are incidents where people invested in oil company stocks and realized that it was a scam, and the company never existed. Or their oil exploration projects were exaggerated and, therefore, wrongly predicted. Proper market research about the company, its oil wells, exploration needs, and products should be conducted before investing in the stocks.
Rewards
Diversification
If you are looking for diversification against the overall economy, investing in oil company stock is your ideal option. When oil and natural gas prices rise, economies can witness a slowdown, where other instruments and stocks can undergo losses. You can consider investing in oil and natural gas stocks to balance the outcome of the economic recession. It can, therefore, offer insulation against inflation and fluctuating market conditions.
Return On Investment
One of the reasons why most investors are attracted to oil and natural stocks is because of their profitable returns on investment. Technological advancements in the industry have led to changes in the dynamics and reduced the risk of investing.
Oil companies’ stock prices usually witness a steady rise when drilling leads to the discovery of huge oil fields. Oil fields may last for years but start making profits within one year of exploration. These oil stocks can provide a stable income source but may come with periodic risks and losses.
Tax Advantages
Energy sector stock investments offer some tax benefits. Most of the income you get from these stocks is usually tax-sheltered, giving you tax advantages.