Why Investing in Oil is a Tricky Prospect Right Now

Oil prices have begun to experience a bit more volatility of late, as discussions involving the Organization of the Petroleum Exporting Countries and their allies have stalled over the strategies various oil producing countries want to employ with respect to oil production levels. The fact that this cartel has such a high degree of power on global oil prices has remained a concern for me for some time.

While I do think OPEC+ does stabilize energy commodity prices to some degree, the reality is that any sector that is driven by headlines to a similar degree than macroeconomic supply and demand fundamentals, volatility can rear its ugly head.

Energy investors have certainly had it tough, and there are no shortage of underperforming companies in this sector. Barring some green energy plays, and some high-quality energy transportation (pipeline) companies, the majority of the sector finished the year in the red due partly to depressed commodity prices and partly to the overleveraged nature of the balance sheets of most companies in the sector.

In this context, I would encourage investors interested in dipping their toes into the energy sector due to some pockets of deep value today, I would encourage diving deep into the quality of the balance sheets of the companies one is looking to invest in.

I think earnings quality and growth potential are really going to get a valuation boost in the years to come if oil prices can continue to slowly rise over time, but again, hoping for something good to happen and investing in companies that make money no matter where commodity prices are is two completely different things.

Invest wisely, my friends.