Say NO To Letting Rising Oil Prices Choose Your Wallet, And Choose A Good Oil Stock, Here's How:

Now that we have covered how to choose oil index and mutual funds in our other post, we will move on to oil stock picking and hedging strategies. Both of these investment methods require their own due diligence and different analysis techniques.

When choosing oil stocks understand that their are 3 major categories: refineries/production, shipping/transportation, and maintenance/rig servicing companies. Therefore, you must consider all the fundamental factors that will affect each category and decide which has the best prospects moving forward, and for your time frame.

Choose the category that will have their margins affected the least by current market conditions. If you are a very conservative investor you may want to consider choosing a stock from each category to be truly diversified among oil, but otherwise we suggest sticking with one category. Your investment allocation in oil as part of your total portfolio is already being diversified, so there is no need to be diversified among several oil categories, also in general there is a high correlation among all oil stocks so being diversified will not reduce the systemic risk.

Once you have narrowed down a category of oil stocks, now you must choose what size of company to invest in: small cap, mid cap, or large cap. Remember, that volatility (risk) will decrease in general as the company is larger along with returns; so small caps generally are the highest returning and most risky, while large caps are usually the lowest returning and the least risky. So if you are a conservative - moderately conservative investor you should choose large cap stocks among the category you choose, mid-cap stocks if you are a moderate investor, and small cap stocks if you are moderately aggressive - aggressive investor.

Lastly, we will move on to exactly which stock to choose among your specific oil business category and size.
You have to decide whether you are a fundamental or technical investor, or maybe a little of each. Fundamentalist's observe micro-economic conditions affecting the company, its financial statements, news, management, and competitors. Technical investors look at charts only, price action, and chart indicators  such as trend-lines, support/resistance, pivot points, and hundreds of other chart/price only elements.

If you decide to choose fundamentally, look for a few stocks with good ratios compared to the industry; industry comparisons and stats. can be viewed on websites such as TheStreet.com, MoneyCentral.com and others. Analyze the management and make sure their have been no recent legal issues and discrepancies with the company. Also, areas that most fundamentalist's miss when choosing oil stocks  that can give you an advantage is the companies market price as share of oil reserve value, oil reserve replacement cost per barrel.

If you choose the technical route look for oil stocks with well defined trends, and easily drawable trend lines. (we are considering most of our readers our medium-long term investors so stocks in a range would not be a good choice for anyone other than short-term "traders") Also look for a stock that has pullback to a upward sloping trend-line or support level and become familiar with indicators such as the RSI, MACD, and Stochastics; divergence in these 3 indicators are good early warning signals of large reversals.

We have now gone over beginner to intermediate techniques of how you can go about choosing an oil stock to profit from our view on oil prices rising in the near- medium term. Both of these areas can be highly advanced. Stick with a simple and proven strategy that you can implement in an understandable manner. For example, following trend-lines ONLY is a technical strategy that has been proven to work very successfully, but mathematical algorithms that literally are 5 pages long and have to be designed by PhD. mathematicians and input into computers by advanced programmers (complex) is also another technical strategy that has been proven to work consistently.

Due to the this post long already, we will cover hedging strategies in our next post. If you need any help at all with choosing an oil stock, deciding which strategy to use, please call us at (262) 939-8885. Thank you for reading, and we hope that this post has helped you some with your oil investment endeavors.