How to pick the best oil stocks

What are the best oil stocks to watch in 2023?

The 'best' oil stocks can be separated into two distinct categories: the fastest growing and the best value. Each has its own advantages and drawbacks, though it's important to note that even a 'growth' oil stock will still have a very large market capitalisation.

Fastest growing oil stocks in 2023

Enbridge

Operates one of the largest oil pipeline systems in the world, transporting 30% of the oil produced in North America. It also boasts an extensive natural gas pipeline system, a natural gas utility business and growing renewable energy operations.

The pipeline operations provide stable cash flow and a virtually impregnable economic moat, backed by government contracts, regulated rates and a high cost of entry. This means it can pay solid dividends year after year, expand its energy infrastructure footprint and invest heavily in wind energy and hydrogen substructure.

Devon Energy

A US-driven exploration and producing company with diverse operations across a variety of low-cost oil basins. The company operates a fixed-plus-variable dividend framework. This framework pays out up to 50% of excess cash flow each quarter after funding its fixed base dividend and capital expenses. The cash-rich company engages in both share buybacks and further exploration to continue to deliver for investors.

Antero Resources

This growth oil stock has outperformed the wider market by a large margin in recent years. Founded in 2002, the oiler is a specialist in exploring hydrocarbon resources via fracking. Plus, it's involved in multiple activities along the supply chain, including petroleum, natural gas and ethane.

The oiler may continue to grow as it operates within a niche in the sector. However, like all growth companies, there will likely be volatility along the way.

Best value oil stocks in 2023

BP

This FTSE 100 oil major has experienced a volatile few years, including the fallout from the Deepwater Horizon Scandal, which has cost the company over $70 billion since 2010. However, the company remains one of the best oil shares to buy. This is because it has benefitted from rising oil prices since the start of the Ukraine War, engaged in share buybacks, increased dividends and experienced continued share price rises.¹

Shell

The second FTSE 100 oil major, which recently divested its Royal Dutch nature, is a very common alternative to BP. The company continues to face accusations of greenwashing, amid other crises. Still, its international operations, combined with the elevated price of oil, have left the company in a similarly positive position as BP.

Chevron

Founded in 1879, this US oil stock is one of the world's most well-known companies, operating in 180 countries. It has exposure to the entire global supply chain, including exploration, development, production, refining and logistics. However, like many blue chips, its price-to-earnings ratio is usually higher than competitors because the stock remains in consistent demand.

ExxonMobil

The result of a late 1990s merger between Exxon and Mobil, this oil titan is one of the largest companies in the industry. While the corporation continues to derive most of its income from hydrocarbon activities, it is actively pioneering research into new green tech to create more efficient fuels. This long-term investment could send dividends higher in time.

ConocoPhillips

One of the most popular US-based oil companies, the firm operates in many of the world's most important oil regions, including Norway, Australia, Canada and the US state of Texas. The company is one of the best oil stocks to buy because it has historically outperformed the wider market – but of course, past performance is no guarantee of future returns.

What affects the price of oil and oil stocks?

Oil is the energy source of the global economy, and there are hundreds of warring factors driving its price up or down at any one time. Specialised oil commodity traders spend their entire professional lives attempting to understand where oil may go next. In short, predicting oil price movements is exceptionally complex.

However, the key elements to consider are:

1. Global demand and supply – this is economics 101, but it needs to be said. All being equal, decreases in demand and increases in supply will reduce the oil price, while the opposite is also true.
2. Geopolitical problems – political instability and war in major oil-producing countries can hugely impact the demand and supply of oil. Political tensions in the Middle East, including the Iranian Oil Crises, are good examples of how oil can be affected. Others include the COVID-19 pandemic and the Russia–Saudi price war.²
3. OPEC policy-making – the Organisation of the Petroleum Exporting Countries is a powerful cartel that controls circa 75% of the world's crude oil reserves and 42% of global crude oil output. It can coarsely affect oil prices by imposing production cuts or increases.³
4. Economic growth cycles – the capitalist system lends itself to cycles of boom and bust, whereby oil increases in price when demand is high in the boom periods and falls during the bust. A component of this phenomenon is inflation, whereby high oil prices feed higher inflation, which then sees consumer purchasing power fall, reducing oil prices.
5. Natural disasters – earthquakes, hurricanes and floods can unpredictably devastate the oil supply of a major producer. A good example is Hurricane Katrina in 2005, which led to a price spike when oil production in the Gulf of Mexico temporarily collapsed.

It's worth noting that trading or investing in oil stocks adds another layer of research and complexity – but we offer oil trading for direct exposure.

How to start trading or investing in oil stocks with us

So how do you go about buying oil stocks? There are many different ways to invest or trade in oil with us, depending on the products available in your region. You might want to buy shares in companies like BP or Shell directly, trade futures and options on leverage using spread bets or CFDs, or trade oil using a commodity-based ETF. Indeed, many investors choose a diversified oil ETF like the Energy Select SPDR Fund to diversify into multiple S&P 500 oil producers. We also offer fully managed IG Smart Portfolios, with competitive fees and full historical transparency.

But to get started:

How to invest in oil stocks with us

1. Create an account or login
2. Research and select your oil stock opportunity
3. Select 'buy' in the deal ticket (you can only go long when investing)
4. Choose the number of shares you want to buy and take steps to manage your risk
5. Open and monitor your position

How to trade oil stocks with us

1. Create an account or login
2. Choose between spread bets and CFDs and research for your oil opportunity
3. Select 'buy' to go long or 'sell' to go short
4. Set your position size and take steps to manage your risk.
5. Open and monitor your position

Remember, trading with spread betting or CFDs comes with added risk attached to leverage. Your position will be opened at a fraction of the value of the total position size – meaning you can gain or lose money much faster than you might expect. You'll also want to keep in mind that past performance isn't a guarantee of future returns.

If you're new to investing or to our platform, why not try our demo account to practise and build your confidence?

Advantages of oil stocks

As oil is so closely tied to the global economy, there are many reasons to invest or trade in the best oil stocks. The most important are:

• Diversification – oil stocks, and particularly oil ETFs, are usually an excellent addition to a diversified portfolio. This is because they are rarely strongly correlated with other traditional assets, such as bonds or real estate, which reduces risk
• Income generation – the larger oil companies almost always pay out dividends, which can be particularly attractive to pensioners looking for steady income and tech-sector investors looking to diversify their risk base
• Growth opportunities – while the price of oil continues to fluctuate, global energy demands are continuing to increase with development and population growth. Further, new oil discoveries and drilling advances can act as oil stock catalysts
• Trading volatility – seismic, geopolitical and natural disaster events can have significant short-term impacts on supply and demand, creating opportunities for traders to profit from the accompanying fluctuations in oil prices
• Inflationary hedge – like the US dollar and gold, oil is a common hedge against inflation. Higher inflation is typically driven by high oil prices, which usually sees oil company profits rise alongside their share prices. This hedge worked very well for investors in the inflationary aftermath of the Ukraine War

Risks of trading or investing in oil stocks

As with all strategies, there are risks associated with investing or trading in oil stocks. These include:

• Price volatility – unsurprisingly, the oil industry is highly sensitive to fluctuating oil prices, which can cause oil stock prices to move erratically. For example, the supply glut in 2014 and 2015 and the COVID-19 pandemic both caused a significant drop in oil prices. These drops can be extremely fast, which can be particularly damaging when trading on leverage
• Beta volatility – the 'beta' (or volatility compared to the wider market) is often much higher than the FTSE 100 or S&P 500. This can create trading opportunities, but volatility is often a double-edged sword. Increased volatility can offer the opportunity to generate faster profits, but conversely means you can lose money quickly if the market turns against you. It's important to consider your risk tolerance and management strategies
• Dividend risk – most oil companies pay regular dividends to investors. However, falling oil prices can make it impossible to pay out the expected dividend. A good example is Seadrill, which suffered more than average during the 2014–15 glut⁴
• Oil spills – accidents happen when drilling, but they cannot be accurately predicted and their outcome on stock price is fickle. BP's Deepwater Horizon fiasco saw the stock fall by over 50%, while Exxon fell by less than 5% after the Valdez spill in 1989
• Regulation – high oil prices tend to generate windfall taxes, which means there is a lid on profits and usually no support when oil prices fall. This effect can be damaging for both investment and oil stock prices, as these taxes often stay in place long after oil prices have fallen back to more reasonable levels

How to pick the best oil stocks summed up

• The most popular UK-based oil stocks are the FTSE 100 majors, BP and Shell
• Oil prices are primarily affected by global supply and demand, which are affected by dozens of complex interlocking factors
• Oil stock investing can be very beneficial because it offers diversification, income generation and a historically proven inflationary hedge
• One key risk is the inherent volatility of oil prices, which can leave dividend returns exposed
• You can trade the oil price and oil stocks in many different ways, depending on your risk attitude