Selecting stocks you can hold for years is a key goal for investors learning how to invest in oil stocks

Nobody has ever consistently predicted the rise and fall of the oil market. If you could do that, you could acquire a measurable proportion of all the money in the world.

We can, however, provide tips on how to successfully invest in oil stocks.

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Industry information won’t give you special insight on how to invest in oil stocks

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 Mideast 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.

All in all, though, 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.

How to invest in oil stocks: Diversify your holdings

We recommend that investors diversify their portfolio across most if not all of the five major sectors, including Resources.

However, some markets are inherently unpredictable, especially markets for fungible goods like oil. Markets like these are so enormous that there is no practical limit to how much you can trade in them. It’s a mistake to build your portfolio in such a way that you have to accurately predict the future direction of goods like oil.

Instead, invest in sound Resource companies that will gain from rising production and cash flow, rather than commodity-price predictions.

How to invest in oil stocks without taking on a extra risk

• Invest in oil and gas energy stocks that own diversified drilling sites in multiple geographic locations where exploration has been successful in the past.
• 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 use innovative new drilling and exploration techniques. Staying ahead of the curve will keep them in business.
• Stay away from 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 itsfindings.

How to invest in oil stocks: Look for these key factors

Resource companies produce and sell commodities, so it’s hard for them to bring a distinct product to market. But they can distinguish themselves by how well they find and produce their products.

Today’s resource projects call for a great deal of engineering, financial and political expertise. The top resource companies—like Imperial Oil or Encana—acquire a lasting competitive advantage by developing their expertise in these areas.

This expertise is another type of hidden asset. It doesn’t appear on the balance sheet, but it gives resource stocks an advantage in every project they undertake.

Resource companies do sometimes turn out to have hidden environmental liabilities, as do companies in other sectors. But the top resource stocks also create their own hidden assets. They accumulate rights to promising acreage long before the land rush starts. They have the technical and political skills they need to foresee and deal with environmental and political obstacles.

This expertise becomes more important as resource technology advances. For instance, recent advances in oil and gas drilling technology helped bring on the plunge in oil prices. The new technology made it possible to vastly increase oil production, even from deposits that were once considered worthless.

OPEC plays a major role in global oil stocks. Do you think this is favourable for the oil-consuming world, or does it just create narrow rules and regulations?

Energy stocks, like oil, can be especially linked to consumer spending. What do you look for in oil stocks to ensure your investment stays profitable?