Hola!!!
Nikhil!!! Where are you, I need the car keys right away, the fuel station closes soon, get me the car keys, shouts Raghu. Nikhil comes with keys and inquires what’s the hurry and need to go for filling station at this time of night. Raghu says, I just heard in the news that fuel prices would hike due to the OPEC meeting agreement. I wish!!! I had a fuel tanker with me, so that, I would have got more fuel today and sell it tomorrow for profit. Nikhil smirks, on Raghu’s comment and says, did you not observed about how crude oil price is established in the trading marketplace. Raghu exclaims, I noted it several times, but never understood how to take advantage of it, since, I had no clarity on how it is calculated and how to take advantage of this price fluctuation by investing into crude oil. I always felt it might be something which is only relation between countries and their supplies but not for individuals. And then, you are saying that I can also invest and take advantage of the upsurge in crude petroleum prices. Nikhil laughs out loud and says my dear idiot, let me explain you on how you take advantage of crude oil price spikes without needing large fuel tankers and midnight rush to the fuel station for to get your car tank filled to save only pennies and moves forward saying henceforth:
OIL
Nikhil: What is Crude oil?
Raghu: Something which is definitely not cooking oil!!!
Crude oil is the raw natural resource that is extracted from the earth and refined into products such as gasoline, diesel, jet fuel and other petroleum products. It is typically obtained through drilling. It is as well recognized as “Black gold.”
Nikhil: What is the history of oil usage?
Raghu: Oh boy!!! My great-great-grandfathers used to only ride on horses
Although fossil fuels like coal have been reaped in one way or another for centuries, crude oil was first heard and developed during the Industrial Revolution, and its industrial uses were first produced in the 19th century. Newly invented machines revolutionized the style we do work, and they depended on these resources to operate. Today, the world's economy is largely hooked on fossil fuels such as crude oil, and the demand for these resources often sparks political unrest, as a modest number of countries control the largest reservoirs. Like any industry, supply and demand heavily affect the costs and profitability of crude petroleum. The United States, Saudi Arabia, and Russia are the leading producers of oil in the world.
Nikhil: How does the Oil and Gas Industry Works?
Raghu: I guess, by using oil tankers and fuel stations
The oil & gas industry is cracked down into three segments: upstream, midstream, and downstream. Upstream, or exploration and production (E&P) companies, find reservoirs and drill oil and gas wells. Midstream companies are responsible for transportation from the wells to refineries and downstream companies are responsible for refining and the sale of the finished products. Drilling companies contract their services to E&P companies to extract oil and gas. Well-servicing companies conduct related construction and maintenance activities on well sites.
Nikhil: How to measure oil production numbers?
Raghu: Simple, in gallons or liters, gas stations prices are presented in the same quantities
E&P companies measure oil production in barrels. One barrel, usually abbreviated as bbl, is equal to 42 U.S. gallons*. Companies often describe production in terms of bbl per day or bbl per quarter.
A common methodology in the oil patch is to apply a prefix of "M" to indicate 1,000 and a prefix of "MM" to indicate 1 million. Therefore, 1,000 barrels are commonly denoted as Mbbl, and 1 million barrels are denoted as MMbbl. For instance, when a company reports production of five Mbbl per day, it means 5,000 barrels of oil per day.
Nikhil: How to invest in Oil?
Raghu: That’s what I have been waiting to learn from you. hmm!!!
Crude oil is a global commodity that trades in markets around the world in spot and futures contracts. Investors may invest in oil as a risky asset, as a portfolio diversifier, or as a hedge against other investments.
Nikhil: What is the difference between Spot Contracts and Future Contracts?
Raghu: Is it not obvious spot is spot; the future is future? That’s it
The monetary value of the spot contract reflects the current market price of oil, whereas the futures price reflects the price buyers are willing to compensate for oil on a delivery date set at some period in the future. A Spot oil contracts bought and sold on the spot markets take effect immediately, exchange of money value reflecting the current price takes place instantly. Whereas, an oil futures contract is an agreement to purchase or trade a certain number of barrels set amount of oil at a predetermined price, on a predetermined date. When futures are purchased, a contract is signed and secured with a margin payment of the full contract price.
Nikhil: What are the major oil contracts?
Raghu: Oh wow, this really sounds important
Crude Oil trading offers excellent opportunities to profit in nearly all market conditions due to its unique standing within the world’s economic and political organizations. Investing in oil, i.e., energy sector can offer decades of passive income and substantial return on investment potential. As a hard asset with low correlation to stocks and bonds, can protect your portfolio from short term market trends. Crude Oil projects offer some of the most attractive tax incentives for long term investments. Meanwhile, we can never outweigh the hazards related with oil investing such as commodity price volatility risk, cutting of dividend payments, and the possibility of an oil spill or an accident during the production of petroleum. However, considering long term investments in crude oil can be highly profitable.
Tidbit Wrap
Crude Oil has been a significant commodity in the world economics and will pertain to be a central participant in defining aspects of the developing countries. New processes like fracking have increased the output content of petroleum oil to match the demands of the fast-moving world. Spot and Future contracts on the prices of crude oil have been an interesting investment opportunity for investors. It has been a profitable long-term investment for black gold enthusiasts.
Opportunities are wide industrial needs, unique standing in world economics, and attractive tax incentives
Obstacles are price volatility and possibility of oil spill
Who should invest here:
Investing in crude oil requires careful consideration, and understanding towards the oil spot and future contracts, along with exposure to energy companies that explore for, produce, transport, refine or sell crude oil. Since directly investing in physical oil requires proper handling and management along with supply chain logistics.
As Nikhil finishes saying the investment aspects of petroleum oil and asks Raghu, if he is having any more doubts or want to recognize anything else. Raghu responds, “this sounds great, but l want to go to the gas station and come back and ask you anymore questions” Nikhil laughs at him and says “ Dog's tail can never be straight and I can never stop you from moving to gas station.”
Oil’s Performance:
Let’s discuss a sample of CRUDE OILs performance from Mr.Vinstors# portfolio:
Year 1940 to Year 1950 - $27 Per Barrel**
Year 1950 to Year 1960 - $25 Per Barrel**
Year 1960 to Year 1970 - $23 Per Barrel**
Year 1970 to Year 1980 - $105 Per Barrel**
Year 1980 to Year 1990 - $40 Per Barrel**
Year 1990 to Year 2000 - $45 Per Barrel**
Year 2000 to Year 2010 - $105 Per Barrel**
Year 2010 to Year 2020 - $50 Per Barrel**
#Vinstor – The Value Street Value Investor
*These are subjected to changes.
**Per Barrel - These are varying estimated values obtained from the historical data on the corresponding companies used as examples for conceptual understanding and do not represent any financial data or investment advice.
Disclaimer : All the conversations are solely for the understanding of the concepts and doesnot represent any live examples.
