Our top recommendations for finding the best oil stocks to buy

Investors refer to buying oil when the price is low as “trying to catch the bottom”. Another way to think of it is “trying to catch a falling knife”. Oil has indeed come down a long way from its peak, but it could drop again. When it hits the “final” bottom, it may turn around and shoot back up again, as it has a number of times in the past. Or it may instead go sideways for months or years.

Look at the best oil stocks to buy as companies that have cash flow from existing wells that is sufficient for, or at least contributes to, the development costs of additional wells.

Politically stable countries are part of the best oil stocks to buy

It’s easy to look at a long-term history of oil prices and detect what you feel is a clear, recurring pattern. However, these patterns occur in response to supply and demand in the market, and both are constantly changing.

Oil optimists assume that demand for oil will keep on growing indefinitely as more people around the world buy cars. Oil supply can also keep on expanding indefinitely however, thanks to technological advances that have opened up vast new oil reserves in shale deposits around the world. Environmental regulations make it difficult to tap into these deposits in some areas, of course. Meanwhile, political turmoil in the Middle East and Venezuela make future supplies of conventional oil more erratic and uncertain.

Politics, weather and market sentiment will determine whether oil users stock up on oil, or cut down on new buying while they use up existing inventory. This can have a big impact on oil-price trends.

Has fracking revolutionized the oil and gas industry?

Shale development boosts oil production as well as natural gas output. This depresses the profit margins of current oil and gas producers, but in some ways that’s a good thing for the overall economy and consumers.

Of course, environmental opposition could also slow the prominence of shale oil and gas production. The shale industry, like any new industry, needs to develop environmentally safe operating procedures.

The most controversial procedure is the hydraulic fracturing, or fracking, of hydrocarbon-bearing shale. This process involves pumping a mix of water, chemicals and other materials into shale rock formations that contain oil or natural gas. This fractures the rock and releases the oil and gas. Some environmentalists are worried that fracking chemicals will leak into drinking-water supplies.

But governments have to weigh environmental opposition against the vast increase in jobs and tax collections that shale development brings.

Tips to keep in mind when searching for the best oil stocks to buy

• Junior energy stocks are risky to invest in, because it’s relatively cheap and easy to launch a penny oil or other energy stock and sell stock to the public.
• Invest in oil and gas energy stocks that own diversified drilling sites in multiple geographic locations where exploration has been successful in the past.
• Stay away from junior energy stocks operating in insecure and politically unstable regions, or in countries with little respect for property rights and the rule of law. Resource extraction is inherently a politically vulnerable business; you can’t move the oil wells to another country, and local citizens sometimes believe that a foreign resource company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.
• Look at the market cap of oil and gas exploration companies versus the estimated value of the reserves they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of their findings.
• Invest in oil and gas energy stocks that use innovative new drilling and exploration techniques. Staying ahead of the curve will keep them in business.

The best oil stocks to buy follow our three-part Successful Investor approach

No matter how intently you read the news on oil, you won’t gain any worthwhile advantage. You have too much competition. This market is simply too big and too widely traded for anybody to figure it out.

Instead, now is a particularly good time to stick to our three-part Successful Investor approach: Invest mainly in well-established, mainly dividend-paying stocks; spread your money out across the five main economic sectors; downplay or avoid stocks in the broker/media limelight.

Then put perhaps half the money you intend to invest in the Resources sector into oil and gas stocks. But only buy these or any stocks if you are prepared to hold them for at least the next several years.

What do you recommend as one of the best oil stocks to buy? Share your thoughts with us in the comments.