Key Points
- Oil prices hit fresh highs not seen for eight years, driven by concerns around Russia/Ukraine
- I can benefit from high prices by considering both share price gains and dividend payments from top oil stocks
- I need to be aware of the volatility that exists when buying stocks linked to commodities
This week, Brent Crude oil prices rose above $100 per bbl, the highest level since 2014. Although this captured a lot of attention, oil prices have been moving higher for the past few months. Even if I go back to Christmas Eve last year, prices were only around $75 per bbl. 2022’s gains have helped to drive top oil stocks higher, boosting profitability. Given the current momentum, here are a few ways I’m thinking of taking advantage.
Aiming for share price gains
The first way is to try to benefit from further share price appreciation. Historically, the shares of top oil stocks have been well correlated to movement in the underlying commodity. Therefore, it’s not that surprising that some of the best performing stocks over the past few months have been in the oil sector.
For example, the Shell share price is up 18% over the past three months, and almost 32% in the past year. Glencore shares are also up 13% in the past three months and 39% in one year.
Looking to the future, I can consider buying these oil stocks with the thinking that if the oil price continues to rise, I should profit from the share price moving higher as well. Some analysts are calling for Brent to return to as high as $125 this year, which would put it back to levels last seen a decade ago.
Enjoying passive income from top oil stocks
The second way I can aim to profit from top oil stocks is via dividend payments. The higher oil price helps to boost revenues for producers, as the end product is worth more. In this way, higher profits allow the business to allocate some to be paid to shareholders via a dividend.
For example, in the latest results from Shell earlier this month, adjusted earnings for Q4 swelled to $6.4bn. This was up from $4.1bn in Q3. It noted that this was largely down to higher commodity prices, citing oil and gas movements. As part of this, the business announced an increase in the dividend per share and a large share buyback scheme.
Therefore, if I buy selective top oil stocks that have a generous dividend yield, I can enjoy this money going forward. It’s also a good way of making passive income. Once I’ve made my investment choice, I don’t have to apply much effort to benefit from the dividend stream going forward.
In terms of risk, any stock that’s tied to the fate of a commodity could cause concern. A top oil stock could be run very efficiently, but if the oil price plummets then it ultimately will struggle. Further, some could argue that the oil price is overvalued. If this proves to be the case, then I could be buying at the top of the market.
