Oil well investing blog
Pros Oil can diversify an investment portfolio It is currently an irreplaceable commodity crucial for modern-day life Oil investments can offer tax advantages for US citizens Depending on the product chosen, it can provide a consistent flow of cash Cons Oil prices can be heavily affected by geopolitical policies There can be rapid fluctuations in oil price The world is trying to decrease its reliance on oil Watch the video: Why oil is about to enter a supercycle What to invest in?
Gone are the days when the only option for investing in oil was to purchase crude directly. Crude oil is certainly still an option, but there are now 5 other ways an investment portfolio can gain exposure to the oil industry. Crude oil Spot contracts An investment in physical crude oil is usually achieved via spot or futures contracts. While individual investors can invest in crude through spot contracts, it does involve the immediate delivery of physical oil. So, as a result, most like to stick with oil futures.
Futures contracts Unlike spot contracts which allow investors to purchase oil at the current market price, futures contracts are an agreement between two parties to purchase a number of oil barrels at a predetermined price on a date in the future. When buying or going long a futures contract, investors profit if the price of oil increases above the price purchased.
And this is, of course, reversed when selling aka going short. Benefits When trading futures , investors are trading the contract itself, rather than the physical commodity. Buying and selling futures contracts provides the advantage that an investor can usually offload their futures contracts to others before needing to take delivery of physical oil.
Many trading platforms offer futures with leverage. When traded profitably it can mean futures are extremely lucrative. Risks Although trading futures can offer higher returns, on the flip side higher leverage can as easily result in much higher losses. As the world turned off the taps and demand for fuel diminished, long oil futures investors could not find anyone to purchase contracts.
Prices continued to fall to attract buyers. It continued until the price of oil futures went temporarily negative. Yep, traders actually had to pay people to take contracts off them. Pretty crazy stuff. Oil stocks A clear alternative to investing in crude oil is to invest in oil-related stocks.
These oil stocks can be categorized into upstream, midstream, downstream, integrated, and service. Classified as upstream because these are the companies that find oil all around the world. By purchasing exploration rights, if oil is found they can make huge returns. Once found, they then extract it from the subsurface. Often exploration rights are purchased without a discovery being made. As oil and gas form the monetary supply of the company, these stocks are heavily influenced by oil prices.
As the name suggests, midstream companies focus on the middle of the supply chain. This involves the transportation and storage of oil after discovery. They also transport refined products. Thanks to fixed contracts, midstream companies can avoid some oil price volatility. The last port of call for oil are those that either refine crude into more useful everyday products or sell oil-based products to consumers. Downstream stocks are heavily influenced by oil prices, as lower prices often mean lower demand for products.
Marathon Petroleum , Valero , and Phillips 66 are a few examples. The combined nature means integrated companies are greatly affected by oil price changes. Oil services. The oil industry stretches far beyond companies that actively explore or produce the stuff. There is a whole level of infrastructure behind the scenes that may provide a great proxy oil stock.
They are not involved directly in any aspect of oil supply but could manufacture parts for wells, collect geophysical data or provide transportation services. Service companies usually expand outside of the oil industry, therefore, can often shelter from oil price movements. Examples include Schlumberger , Haliburton , and Baker Hughes. These quarterly or bi-annual payments can be reinvested to increase the growth of a portfolio.
Depending on monetary streams some oil stocks can provide shelter from oil price volatility. Risks Selecting one or two oil stocks can lead to a lack of diversification. Remember to do your own research DYOR on individual companies. Oil ETFs A classic alternative for those not wanting to select individual oil stocks is to invest in an oil-focused exchange-traded fund ETF.
ETFs are a collection of stocks that can be purchased all at once. They are usually offered by investment banks or financial institutions. An oil-focused ETF may be the optimum solution if you have an appetite specifically for oil and want to keep exposure as diversified as possible.
By gaining exposure to a collection of upstream, midstream, and downstream stocks it can limit the risk of market downturns. Benefits A quick and reliable way to diversify an oil investment. Just like oil stocks, some ETFs pay dividends to investors. Although potentially not as high as individual stocks, dividends can provide quarterly or bi-annual cash flow.
When exploring for oil, land is usually dissected into smaller pieces of exploration acreage. The owner of each acreage holds the mineral rights to everything found. One needs to realize that to even have a chance at being profitable a pay zone or reservoir must contain these characteristics: The reservoir must have a well-defined trap with top and bottom seals that maintain pressure and prevent transmigration of the hydrocarbons. The porosity must be large enough to contain economical volumes of oil and natural gas.
The permeability must be enough to allow the reservoir to flow at an economically feasible rate. Understanding how the Industry verifies these three characteristics before drilling is crucial to be an informed Small Producer. Understanding to what degree a prospect fulfills each of these conditions allows one to better assess the risk associated with the exploratory well for that prospect. Since Edwin L. Drake drilled the first oil well in in Crawford County in Northwestern Pennsylvania, the oil industry has been trying to address each one of these characteristics.
However, even now the industry has only been successful in verifying the first of these characteristics with any degree of certainty before a well is drilled. When we find attractive, prospective reservoirs with 3-D seismic that are in relatively close proximity to producing wells, the geologists and geophysicists can only speculate that the reservoir they found should have the same or similar porosity and permeability of nearby wells this is called well control.
Herein lays the core of all speculation and risk in oil and gas exploration. Although we have seen recent improvements in the accuracy of finding reservoirs, scientists still have no way of determining what is in the reservoir until the exploratory well is drilled into it. However, as mentioned, they can determine with reasonable accuracy if the reservoir has four walls and what the physical dimensions of the reservoir are. The other two characteristics can only be speculated upon using data from nearby wells well control that have drilled through an analogous reservoir near a prospective drilling location.
The track record of how accurate the nearby wells are at predicting the porosity and permeability of the prospect well totally depends on what type of reservoir is being pursued. For example, a simply-formed blanket sand that has a large footprint is very good about revealing porosity and permeability numbers. The study of nearby wells can predict with great accuracy whether the sand is a blanket sand like a deep-water deposit or channel sand like a river deposit that will be limited and will not likely predict porosity and permeability in any future offsetting prospect well s.
Similarly, a field that is complexly deformed is generally very thick but not very wide; therefore, the footprint is small, and the offsetting wells may or may not have similar trapping potential. This inability to determine accurately what the actual makeup of the reservoir is the fundamental of what makes exploration so risky.
Advanced Technology The primary goal of research and development in the hydrocarbon exploration industry is to try to improve on what little information we have on the composition of reservoirs before we drill into them. Advanced technology can help us look inside a potential reservoir and give us the ability to speculate with greater validity on the presence of oil and gas. Much technology is still under development, and we believe in applying breakthrough predictive tools that will further reduce risks with exploratory wells.
But even with this limitation, the oil and gas business is one of the most worthwhile businesses in the world. One can only imagine what will happen to industry accomplishments through discovery improvements with technological advancements. Concerning Operators: The Small Producer must know his operator s. You can have one of the greatest discoveries, but a sloppy or unscrupulous operator can make a cash cow become a money pit.
Make it a practice to deal only with operators with proven track records and monitor via forensic audits any operations that are suspect.
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