Donald Trump's Iran Blockade Announcement Sent Oil Prices Surging and the Dow Falling

Written by Reuben Gregg Brewer for The Motley Fool->

There was a tentative agreement to negotiate in the Middle East, leading oil prices lower.

When Donald Trump announced a renewed blockade of Iran's ports, oil surged again, and the market fell.

The geopolitical conflict in the Middle East isn't good news for the world. Not only is there destruction and loss of life, but the energy market isn't functioning normally. Oil and natural gas are commodities, so reduced supply leads to higher prices. You are already seeing the impact at the gas pump, but high energy prices will eventually raise the prices of other products, too.

Here's what you need to know about what's happening and why companies like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) are likely to be the best energy investment options for most investors.

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Energy prices had been heading lower after Iran and the United States agreed to negotiate. However, those talks didn't work out as well as hoped, highlighted by U.S. President Donald Trump's announcement that Iran's ports would again face a blockade. Oil prices surged, and the broader market fell on the news. Emotions and news flow are driving commodity and stock markets. This is entirely normal.

In fact, the energy sector is well known for its volatility. Oil and natural gas prices are impacted by geopolitical conflict, economic activity, natural disasters, and supply and demand dynamics. The price swings can be large and shockingly fast. The current events in the Middle East are headline-grabbing, but just the latest example of the long-term trends you need to be ready to deal with if you own an energy stock.

This is why most investors should stick with large and well-diversified energy giants like Exxon and Chevron. Not only are they two of the world's largest energy companies, but their globally diverse and integrated businesses span the entire energy value chain. This diversification helps to soften the impact of commodity price swings. They are also financially strong businesses, with debt-to-equity ratios of around 0.2x and 0.25x, respectively. Those would be impressive numbers for any company.

Meanwhile, Exxon and Chevron are also reliable dividend stocks, with yields of 2.7% and 3.7%, respectively. They have each increased their dividends annually for decades despite the energy sector's inherent volatility. This is important because it allows you to focus on dividend checks rather than oil prices during the inevitable periods of commodity volatility.

When investors see major world events, the temptation is to try to capitalize on them. When it comes to oil and natural gas, however, volatility is so normal that this is a very risky approach. Most investors will be better off accepting the volatility and adjusting their stock selection to account for it. Exxon and Chevron are proven survivors with great dividend track records and attractive yields. They are good through-the-cycle options for most investors in the energy patch, not just dividend lovers.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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