Recently, I’ve been looking at opportunities in oil stocks and noticed that many people are blindly chasing stocks that are already up. In reality, the logic for making real money is completely different.

Speaking of which, this year’s performance in oil prices has indeed been astonishing. Influenced by the situation in the Middle East, Brent crude oil once broke through the $100 mark. Although it has since pulled back to the high $90s, the increase since the start of the year is already more than 60%, setting record extremes in recent years. This kind of market naturally attracts investors’ interest, but the key is that you need to figure out which oil stocks will truly benefit.

I’ve noticed a common mistake among many new investors: they start chasing right after looking at the gainers list. But the structure of the oil industry supply chain determines everything. Even among companies that all have an “oil” theme, when oil prices rise, some deliver big positives, while others see costs increase and profits get squeezed.

Simply put, upstream exploration and production companies (such as ExxonMobil) are the most sensitive to oil prices—every $1 increase in oil prices amplifies their profits. Midstream pipeline companies (such as Enbridge in Canada) are more stable, because they mainly collect tolls and are hardly affected by oil-price fluctuations. Downstream refining and petrochemical companies (Formosa Petrochemical, Formosa, and South Asia) fall in between: they profit from the spread between crude oil costs and the selling prices of finished products.

For investors in Taiwan, the Formosa Plastics Group’s “four treasures” are the most direct choice. Formosa Petrochemical is Taiwan’s only refinery. When oil prices rise moderately and downstream demand remains steady, the cracking spread can be maintained within a reasonable range. Gross profit margins stay stable, and the stock price tends to rise along with it. As petrochemical companies, Formosa and South Asia depend on the entire petrochemical cycle, not just oil prices. They only shine when oil prices rise steadily, downstream customer demand is strong, and customers are willing to accept price increases. If oil prices surge and costs jump significantly, but product prices can’t keep up, you can end up with the situation of “oil prices rise but the stocks don’t.”

U.S. stock options are even more diverse. ExxonMobil and Chevron are global leaders, with businesses covering the entire industry chain. They are highly sensitive to oil prices, but also have strong downside resilience. Enbridge in Canada has a dividend yield as high as 7% and stable cash flow, making it suitable for dividend investors. If you want higher flexibility and risk, upstream options like ConocoPhillips or LNG concepts like Cheniere are also possibilities, but these are more suitable for investors with trading experience who want to do swing trades.

One thing to remind you of here is that oil stocks really have three main attractions. First are cyclical opportunities: when economic conditions improve and oil prices surge, upstream companies’ profit growth can far outpace the percentage increase in oil prices. Second are geopolitical events driving the market: sudden situations like fighting in the Middle East or blockade-related disruptions in the Red Sea can temporarily push oil prices up by 20%-30%. Third are high dividends: when oil prices remain stable above $70, most oil companies have strong cash flow and are more willing to distribute dividends and conduct share buybacks.

But the risks are just as clear. Demand could drop sharply, causing oil prices to crash by 20%-50%. In the long run, the pressure from the energy transition will continue to limit the valuation of upstream companies. Another trap that’s easy to overlook is that some companies become overly optimistic at oil price peaks, take on heavy debt to expand production, and then face a crisis during the downturn.

From a fundamental perspective, authoritative institutions forecast that in 2026 the global oil market will actually be in an oversupplied situation, with a daily surplus of 1.87 million barrels. This is the core reason why oil prices are kept from rising for the long term, and it’s also the key reason you can’t blindly chase oil stocks.

For small investors, my advice is not to overcomplicate things. You can simply buy an oil ETF to diversify risk and make it easier. Or you can choose a combination like Formosa Petrochemical together with Formosa—you can profit from price swings and also receive dividends. If you want exposure to U.S. stocks, a balanced mix of Enbridge and ExxonMobil is both steady and flexible. Most importantly, never go all-in. Be sure to set stop-losses and control your position size, because when the business cycle turns, a 30%-50% pullback in oil stocks is completely normal.

In the end, oil stocks are about making quick money and profiting from cycles, not about relying on dividends to sit back and earn long-term returns. By catching the trend and controlling risk, you can generate stable profits in this round of market action.