Black Gold

Oil continues to rule the energy sector as demand for it keeps rising. Oil companies have also sustained their ability to profit, notwithstanding a challenging oil price environment, by improving their sustainability in operations. There are many ways to invest in oil commodities — purchase an oil barrel, engage in a futures contract or options contract, or buy shares of an oil ETF.

More About Oil

  • Oil is the largest and arguably most important commodity market in the world
    • Oil (energy) is what drives our modern world - every country uses and needs it
    • The oil market is larger than all other mined commodities (metals) combined
  • Wars or other large military conflicts in the middle east tend to cause the price of oil to peak
Oil Uses (2018)
  • 20% cars & light trucks
  • 24% trucks
  • 12% other transport
  • 28% industry
  • 5% power
  • 11% other

Oil Pricing
  • Oil is a global commodity that trades on the global level
    • It is fairly easy to transport anywhere in the world
    • There are few differences in price across the globe
  • The price thus depends on global supply and demand balances
  • A growing global economy usually supports oil prices
  • Global recessions or other crisis tend to reduce demand and similarly the price of oil
  • OPEC meetings and production targets can also drive prices
  • Embargos and Sanctions can impact supply
  • Regional conflicts and wars can impact supply
    • 1973 Oil Shock
    • 1979 Iranian Hostage Crisis (sent oil to $40 creating a panic)
  • Exploration and Development from the previous years can impact supply
  • The Oil price depends on supply and demand cycles
  • Global Growth = More Demand = Higher Price
  • Supply Disruptions = High Price
  • Inflation  = High Price
  • Deflation = Lower Price
  • Some Oil Exporting Countries require a certain Oil price to balance their budget:
    • Saudi Arabia ($85/barrel estimate in 2018)
    • Russia ($68/barrel estimate in 2018)
    • Iran ($100/barrel estimate in 2018)
  • Geopolitical Events can impact the price of oil
    • Sanctions on oil producing countries = lower supply = higher prices

United States Crude Oil Demand

  • Typically largest in summer (big driving season)
    • Crude in storage drops
  • Refineries go into maintenance mode in fall when demand goes down
    • Crude in storage increases
  • Over time US fuel economy has almost doubled (since 1970s)
  • Oil exporting was illegal in the US from 1976 till 2016

Largest Oil Producers

  • Worldwide 80 million barrels per day (2018)
  • Top 3 produce ~37% of all world oil
    • Saudi Arabia (~10 Million Barrels / Day)
    • United States (~10 Million Barrels / Day)
    • Russia  (~10 Million Barrels / Day)
    • Are large enough to impact prices with production increases or cuts
  • Russia & Saudi have typically been the largest - fracking pushed US to the top spot in late 2010s

Impact of Renewables (2018)

  • Although renewables are growing, oil is is still the backbone of transpiration energy
  • The world buys $6billion of oil every day