The ongoing war between Russia and Ukraine has kept oil prices high and exacerbated global inflation. The Brent crude futures price rose by more than 40% since the beginning of this year. While opportunistic investors may bet on oil price volatility, many rational high-net-worth individuals strive to build a more diversified portfolio. What are the wise choices that Asian investors should consider now?
To solve the oil market’s current short supply and price surging, the U.S. administration is looking for various solutions, including unleashing massive U.S. strategic reserves and expanding the use of ethanol-blended gasoline. And recently, under U.S. pressure, OPEC agreed to accelerate oil production by 648,000 barrels per day in July and August to recover some loss from the European Union’s partial ban on Russian oil imports. Still, it’s doubtful whether such a target could be met.
Darren Woods, the chairman and chief executive of ExxonMobil, expected the market would be “continued fairly tight” in the next three to five years. And many analysts see oil demand increasing further as China, Asia and Europe reopen this year.
Until now, the market is not seeing an effective measure or a turning point in keeping oil prices down. The price for crude oil still stands at the highest level since 2008. So what does this mean for your investment portfolio?
Stocks and Bonds of Oil Companies Look Promising but Volatile
Buying the stocks of oil companies is an easy starting point for investing in oil. The stock price of companies such as Exxon Mobil (XOM) and Chevron (CVX) are outperforming the market this year.
However, many factors other than the oil price are shaping the stock price of oil companies. Oil companies can engage in business areas such as exploration, refining, transportation, chemicals, and energy technology. As a result, some companies could be less sensitive to oil price changes, and the performance of individual stocks in this field can be enormous.
Amid the risk of a global recession and economic uncertainties, oil prices have been relatively high due to embargoes and supply constraints. Oil companies are now very lucrative and have higher solvency than before. Also, as the bond yields rise, the oil company bonds become more attractive in the short and middle term. Still, the bond value can be relatively volatile over a short period.
In contrast, owning a crude oil futures contract is a direct way to trade and speculate on the oil price. However, crude oil futures are short-term investment products exposed to substantial price fluctuations. The price can fall to zero or even negative numbers, and investors may lose their margin. And it is impossible to adopt a stronghold strategy and wait for a rebound like buying stocks or ETFs.
Building a Diversified Portfolio is Essential
Risks from the supply chain, geopolitical incidents, government regulation and the development of green energy are inevitable in oil investing. Moreover, the surge in oil prices could make everything more expensive, worsening inflation and stimulating fears of a global recession. Whether you are planning to bet on the oil price or not, the oil price is creating risks for you.
In the days of uncertainty, building a comprehensive and diversified portfolio is essential to protect your assets. Go beyond the energy sector and consider diverse risks with more safe-haven assets such as gold, government bonds, defensive stocks and even some U.S. dollars. Remain relatively high financial liquidity so the market swings would not easily affect your daily life.