Should I hang onto energy stocks as oil prices drop?

By
Matt Krantz, USA TODAY
October 3, 2011, 8:53 PM ET
3 min read

— -- Q: Why are energy stocks like ConocoPhillips (COP) falling so much, and should I hang on?

A: There's one thing investors in energy stocks need to watch very closely: The price of crude oil.

Many factors influence the profitability of energy companies. And there are factors other than just the price of oil that influence the share prices of energy stocks.

Still, for most regular individual investors, if you watch the price of oil, you get a pretty good idea of why the stock is rising or falling. Try plotting shares of ConocoPhillips cop against the United States Oil Fund exchange-traded fund uso , using a stock chart service like the one at . Type in USO in the Get a Quote box at money.usatoday.com and select United States Oil Fund LP to get the snapshot of the ETF. Select the Charts tab and below the graph in the Symbol Compare box enter COP and Update Chart.

You'll see that ConocoPhillips stock is less volatile than the price of oil. After all, ConocoPhillips' stock is down about 10% this year while the United States Oil Fund is off about 22%.

But when the price of oil is falling, as it is now, pressure is applied to ConocoPhillips' stock. It's not a perfect relationship, since ConocoPhillips is a diversified oil company. Clearly, though, the falling price of oil is a depressant on ConocoPhillips' stock.

Oil prices are falling because investors are worried the global economy is slowing down. And if that happens, and factories slow down and fewer miles are driven, the demand for oil will fall, too.

Investors wondering when shares of ConocoPhillips can recover must watch the price of oil. Only when oil prices recover will investors in ConocoPhillips see a significant rise in their shares.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz