Commodity producers at their most basic level are pretty easy to understand. Their underlying profits are determined by the price of what natural resource they mine or pull out of the ground. So it stands to reason, if the price of corn, copper or crude oil rises, the commodity firm will make more money. Conversely, if it drops, they make less.
And this basic relationship with the price of crude oil and natural gas pretty much sums up energy stocks for the last few years.
However, for the largest energy stocks this relationship doesn’t necessarily hold true. Since the recent crash in energy prices, the biggest energy stocks have worked hard to change their positions and dynamics. For investors, this could mean big buys regardless of what energy prices are doing.
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Boom, Bust and Energy Stocks
The last few years in the energy sector could only be described as a roller coaster ride. We’ve gone from one extreme to another as tightness in supplies have turned into gluts of epic proportions. As global supplies of oil kept building in the face of rising production from key energy-producing regions, prices dropped from $114 per barrel all the way down to lows not seen in decades.