The geopolitical conflict in the Middle East is driving investor sentiment in the energy sector and more broadly, given the importance of energy to the world economy. There is no clear off-ramp for the world just yet, which means investor emotions will remain elevated and highly influenced by news flow from the conflict. With no end in sight, investors need to step back and think carefully about the energy sector.
1. Put this into Historical context
For better or worse, the current volatility in the energy market isn't all that unusual. In fact, it is pretty normal. Geopolitical conflict, economic swings, supply and demand dynamics, and even large weather events or natural disasters can materially sway commodity prices. The price of energy stocks tends to follow along with commodity prices.
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If history is any guide, this too shall pass. That doesn't mean you should ignore the events unfolding in the Middle East. But historical context can make the uncertainty seem a little less distressing, since the world has lived through similar periods of uncertainty before and survived.
2. Err on the side of caution with integrated energy stocks
Most investors should have some exposure to energy, given the sector's importance to the world. However, since the sector's volatility is well documented, it is probably best to take a conservative approach to energy stocks. That will likely mean buying financially strong, diversified businesses like integrated energy giants ExxonMobil (XOM 0.35%) and Chevron (CVX 1.51%), which have both proven they can survive the entire energy cycle.
NYSE: XOM
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That's highlighted by the decades of annual dividend increases each has behind it. Add in Exxon's 2.7% yield and Chevron's 3.7% yield, and the story gets even better. The key, however, is that having exposure to the entire energy value chain helps to smooth out the impact of the normal swings that energy prices go through.
NYSE: CVX
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3. Avoid commodity exposure with midstream stocks
If even Exxon and Chevron are still a bit too much for you, then you may want to look at a midstream business like Enterprise Products Partners (EPD +0.25%). This large North American master limited partnership (MLP) owns energy infrastructure that moves oil and natural gas worldwide. It charges fees for the use of its assets, so commodity prices aren't all that important to its financial performance.
NYSE: EPD
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Enterprise is actually a slow-growing and boring business. But with a 5.8% yield and 27 annual distribution increases behind it, it is the kind of energy investment that will let you sleep well at night even during turbulent times for the sector.
At the end of the day, don't ignore what's happening in the Middle East. But if you put it into historical perspective, you'll likely find that you can still make savvy moves even while uncertainty is high in the energy sector.
