How does the drop in oil prices affect long term investments in the oil drilling industry?

21 April 15

Weekly and sometimes daily oil market shifts can be daunting even to a seasoned investor. Continual drops in oil prices certainly intrigue investors to purchase stocks in oil and drilling service companies. Sector mutual funds lean towards investing in energy-related stocks as well. With the volatility and downward price shifts, investors are not counting on quick returns rather needing to strap in for the ride. When the price of oil stays low for too long, it can struggle against the cost to extract it and so can be simply left in the ground. For those nations that are seeing an increase in oil exports like Nigeria and Angola, extended low prices increase their geopolitical risk. Economic instability can quickly get set into motion. The formula for stability is an increase in global demand spurred on by low commodity prices.

The drop in oil prices adds to the increase in consumer spending as people now have extra money to buy clothing and take vacations. However, the volatility means that stocks, bonds and currencies react accordingly. Many industry analysts attribute the recent price drop to higher production rather than decreased demand. This is a positive sign for a long-term investor. A price drop due to low demand is typical of depressed economic conditions which is not the overarching contributing factors today. Lower gas prices contributed to higher than normal retail sales in November of 2014. Decreased energy costs also benefit businesses such as manufacturing companies and airlines and aid oil-importing economies around the globe.

Contract drilling services companies—hit the hardest by the price shifts—are being watched closely by investors primarily for their potential to be slowed down or even close, making them high risk. Add to this geological factors that can’t always be determined that can result in unsuccessful drilling—adding to the risk factors. Investors are wise in this volatile industry to proceed cautiously and obtain the best financial advice possible.

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