Here's Why Oil Prices Are Surging Right Now

The news headlines are filled with moment-by-moment coverage of the current geopolitical conflict in the Middle East. And oil price volatility, as you might expect, has dramatically increased. If you are a long-term investor, you need to consider this issue in a broader context. And that context highlights why most investors should stick with diversified energy industry giants like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX).

The clear answer isn't the real answer

It seems fairly obvious that oil prices have spiked and fallen entirely because of news surrounding the geopolitical conflict in the Middle East. And, to some extent, that is absolutely true. However, before this conflict, there was uncertainty surrounding the unfolding geopolitical events in Venezuela, which came and went.

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The reason oil price volatility has become an issue is traders' emotions. As with any market, when fear and greed are at play, prices can go haywire. The current oil price volatility, while shocking in some ways, is actually something investors should expect. It is just how the energy sector works. It is neither good nor bad; it is simply a fact of life that has repeatedly occurred.

Prepare for oil volatility with Exxon and Chevron

When oil prices rise dramatically, the biggest winners are likely to be pure-play producers. This is because their top- and bottom-lines are entirely driven by oil prices. However, when oil prices fall dramatically, the biggest losers are likely to be pure-play producers for the very same reason.

If you want to invest in the energy sector for the long term, you should probably own integrated energy giants like Exxon and Chevron. They each have exposure to the upstream (production), the midstream (pipelines), and the downstream (chemicals and refining). Each segment of the industry operates a little differently through the energy cycle. That, in turn, helps to soften the peaks and valleys. Notably, oil is a key input for the downstream segment, so falling prices are usually a net positive.

On top of that diversification, Exxon and Chevron also have the strongest balance sheets in their peer group. That allows them to take on debt during deep industry downturns so they can continue to support their businesses and dividends until prices recover. When prices recover, as they always have historically, debt is reduced.

In short, Exxon and Chevron are built to survive through the industry's ups and downs while rewarding investors for sticking around. Notably, both have increased their dividend annually for decades.

This is normal, and you can prepare for it

So the reason why oil prices are volatile is the emotional swings that come with geopolitical conflict. They are a normal part of the energy sector and you should be prepared to deal with them as a long-term investor. A good solution is to stick with large, financially strong, and diversified industry-leading companies like Exxon and Chevron.

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.