Recently, tensions in the Middle East have flared up again, with oil prices once surging past $120, prompting many to refocus on oil stocks. Honestly, I've read a lot of analyses, most of which are promoting short-term gains, but few clearly explain—how do oil stocks actually make money, and what pitfalls should be avoided.

First, let's talk about the current situation. Brent crude oil is currently fluctuating around $90-$92, and since the beginning of the year, it has increased by over 60%, which is rare in recent years. But there's a fundamental issue many overlook: according to forecasts from the IEA and EIA, by 2026, the global oil market will actually be in a surplus, with an excess of 1.87 million barrels per day. In other words, this rally is mainly driven by geopolitical premiums; once conflicts ease, oil prices could fall back quickly. That’s the core reason why you shouldn’t blindly chase high in oil stocks.

So, the question is, can you really buy oil stocks? The answer depends on how you buy.

I've noticed many people choose oil stocks in a particularly "lazy" way—simply looking at the top gainers and buying the ones with the fastest rise. But this is actually the easiest way to get caught in traps. What truly determines whether an oil stock will rise or fall isn’t short-term limit-up speed, but its position in the industry chain. Even among oil concept stocks, some benefit directly from rising oil prices, while others see costs increase and profits squeezed.

Let’s break down the industry chain logic simply. Upstream exploration and production companies (like XOM, COP) are most sensitive to oil prices; for every $1 increase in oil, their profits can amplify by 20-30 times. Midstream pipeline and transportation companies (like ENB) earn mainly through "tolls," and are hardly affected by oil price fluctuations, but their dividends are stable. Downstream refining and plastics companies (like Formosa Plastics, Formosa Petrochemical) are in between—they rely on the spread between crude oil costs and finished product prices; a sharp rise in oil prices can actually compress their margins.

For Taiwanese investors, the Formosa Four Giants are the most familiar choices. Formosa Plastics is Taiwan’s only refinery, and benefits most when oil prices rise moderately; as crack spreads stay within a reasonable range, their gross margins can remain stable. But companies like Formosa Plastics and Nan Ya Plastics are different—they need stable rising oil prices, strong downstream demand, and a willingness to accept price increases. If any link in this chain breaks, it could lead to the awkward situation of "oil prices rising but stocks not."

If you want more flexibility, US oil stocks offer more options. ExxonMobil and Chevron are global giants, covering the entire industry chain, and tend to be more resilient. Canadian Enbridge offers a high dividend yield of around 7%, suitable for investors seeking stable cash flow. LNG companies like Cheniere benefit from the global energy transition, showing strong growth potential but also higher volatility.

At this point, I must remind everyone of a risk many overlook. The biggest trap in oil stocks is treating short-term cyclical movements as long-term investments. In 2023, ExxonMobil’s net profit skyrocketed from $23 billion to $55.8 billion, but this explosive growth was based on high oil prices. Once the economic cycle reverses, a 30%-50% correction is normal. In 2020, BP cut dividends by 60% due to cash flow pressures, causing long-term shareholders to suffer double losses.

So, if you really want to participate in the oil stock rally, here’s my advice. Beginners can directly buy oil ETFs, such as Yuanta Oil ETF, which can be entered with under 3,000 TWD, without researching individual stocks. If you want more yield flexibility, you can allocate some Formosa Plastics and a few stable dividend-paying US oil stocks. If your goal is short-term trading based on volatility, then use CFDs directly to avoid currency exchange hassles.

One last word: oil stocks are meant for "quick money" and "cyclical profits," not for long-term dividend income. Setting proper stop-losses and controlling position sizes are key to steady profits in this market.