Crude Oil Prices Are Still High. Should You Buy Oil Stocks Now?

While crude oil futures have come down off their highs of about $120 per barrel set early Monday, they are still elevated due to the Iran war, which began on Saturday, Feb. 28, when the United States and Israel launched a joint air attack on Iran in an operation dubbed “Operation Epic Fury.”

On Wednesday night, March 11, at about 9:30 p.m. ET, Brent oil futures are trading at $93.63 per barrel, up 6.6% from Tuesday and up about 31% from their pre-war price of just over $71 per barrel. Brent is the international benchmark. West Texas Intermediary (WTI) crude oil – the U.S. benchmark – is trading at $93.79 on Wednesday evening, up 7.5% from Tuesday.

Image source: Getty Images.

How high oil prices hurt consumers

The problem for consumers with high oil prices goes beyond rising gasoline prices, which get the lion’s share of press attention. In addition, heating oil prices rise for those – mostly in older areas of the Northeast – who have oil heating.

Moreover, the cost of most products will increase because transportation costs to wholesalers and retailers rise. Farm products and other heavier products with high transportation costs tend to be particularly hard-hit. This is why high oil prices are very inflationary. Granted, a quick bleep-up in oil prices might not ignite inflation significantly, but an extended rise almost certainly will.

History has good news on oil spikes caused by geopolitical and other events

History has good news on oil spikes caused by geopolitical and other events: They tend to be relatively short-lived. In the case of war-driven oil price spikes, oil prices tend to subside quickly after combat operations end, sometimes even before they fully end, because the markets are forward-looking.

We’ll get to some examples in a moment.

Oil stocks are probably not attractive as short-term investments

Yes, the relatively quick historical price spikes up and down mean it’s probably not a good idea to buy oil stocks at this point solely because of the Iran war.

If you’re interested in oil stocks as a long-term investment, however, that’s another story. Carefully selected ones could be attractive as long-term, income-producing investments. One thing the Iran war makes clear about energy is this: The U.S. (and most of the world) is still very dependent upon oil to sustain and grow its economy.

Expand

NYSE: EPD

Enterprise Products Partners

Today’s Change

(1.31%) $0.48

Current Price

$37.20

Key Data Points

Market Cap

$80B

Day’s Range

$36.66 - $37.33

52wk Range

$27.77 - $38.22

Volume

3M

Avg Vol

4.5M

Gross Margin

12.86%

Dividend Yield

5.85%

Midstream oil stocks can make attractive, income-oriented long-term investments

As a group, the best oil stocks to invest in are typically midstream companies (which store and transport the commodity through pipelines). Their financial results are less affected by changes in oil prices because they operate on fee-based, long-term contracts. They’re often called the “tollbooth collectors” in the oil industry.

Two top major midstream oil stocks are Enterprise Products Partners (EPD +1.31%) and Enbridge (ENB 0.11%). Shares are paying juicy yields of 5.91% and 5.31%, respectively. Both are worth further exploring.

There are also oil exchange-traded funds (ETFs) that invest in specific areas of the oil industry, such as midstream stocks, as well as those that invest in the broader industry.

Examples showing the duration of oil price spikes caused by wars

The Iraq war was a U.S.-led coalition that invaded Iraq, whose aim was to overthrow Saddam Hussein’s regime over claims of weapons of mass destruction.

Data by YCharts.

The Gulf war started when Iraq invaded its neighbor, Kuwait. (Excuse the typo in the chart below. It should read “Gulf War.”)

Data by YCharts.

Russia’s full-scale invasion of Ukraine caused a huge initial spike in oil prices due to both fears of supply disruptions and sanctions against Russian oil and other products. This war is ongoing.

Data by YCharts.