So far this year the Dow Jones Industrial Average [.DJIA] is up over 700 points. Unfortunately, for those enjoying the glamor of a seemingly improving economy, oil prices have risen just as fast. Year to date, Crude Oil has risen $10 a barrel while Brent Crude has risen almost $20.
With the national average of gas jumping almost 30 cents in the past month according to AAA, the pinch of higher gas prices is just now coming to the forefront.
Below are a variety of reasons prices will only go higher.
- Iran: The oil markets take advantage of any opportunity they can to go higher and Iran has provided them with a big opportunity. Facing sanctions from both the United States and the European Union over what is believed to be nuclear weapons development, Iran is enjoying the rise in prices while also finding other nations to sell their oil to.
- Mideast Turmoil: If you thought the overthrow of the Egyptian president last February was a little rattling for the oil markets, the worst is quite possibly yet to come. Although not imminent, the Israelis have made their worries over Iran's nuclear development clear and if Iran does not give in to worldwide calls for them to abandon such development, Israel may be forced to attack - a move that would catapult oil prices to new highs.
- Weak Dollar: It's no secret moves in the US Dollar Index [.DXY], being the world's reserve currency, have a direct impact on the price of crude. Since mid-January, the dollar index has dropped over four percent, undoubtedly intensifying the rise in crude prices. Depressed in value by factors irreparable in the short term such as a rising national deficit, the chances of a quick recovery in the index are nonexistent.
So what does this all mean to investors? It means gas companies and their shares are just beginning to surge. Ready to lead the pack is Exxon Mobil (XOM).
After tripling in price from 2003 to 2008, Exxon's shares have enjoyed a 10% appreciation in value in the past month amidst the higher fuel prices. Still, the company's management is focusing on expanding and growing the company even more.
After the close of trade on February 24th, management at the company announced plans "to spend at record levels in the years to come." Such a statement affirms the company's balance sheet while also illustrating just how much bigger and more powerful the oil giant may become.
Exxon also benefits in the market by being a blue chip which typically protects shares from wild price swings which tend to dominate the oil markets as illustrated below.
Although current global indicators make Exxon's stock a solid potential growth story this year, it is imperative to implement stop loss orders when dealing with a sector such as volatile as that of the oil markets. With shares twice bouncing off the $83.50 level in the month of February, a stop loss order at $83.50 would be appropriate for any buy orders executed in the next few weeks.