Investing in Oil

Why Crude Oil

Crude oil is also known as black gold. This is because the supply of crude oil is literally indispensible to every nation in the world. This is because crude oil accounts for over 40% of the supply of energy worldwide. No other commodity comes even close!

Without the availability of crude oil, the supply of electricity would be interrupted. However, transportation will be literally jammed. Nobody will be able to drive, sail or fly without the availability of oil. Therefore the strategic importance of crude oil cannot be overstated!

Picking Your Bet

However, before crude oil becomes available to industrial consumers, it passes through a value chain composed of several different players. Many of these players have conflicting interests and one can grow only at the expense of the other. Therefore, as an investor one has to be careful about which part of the value chain one invests in. It is therefore critical that one first understands the market fundamentals and then predict how they are likely to impact the various players in the market.

Know The Consumers

Developed nations are the biggest consumers of oil worldwide. However, some of these nations also have oil resources themselves. As a result, they may use domestically manufactured crude oil to meet some of their fuel needs and may then import to make up the shortfall. Consider the case if United States of America. It is the third largest producer of crude oil in the world and with the advent of shale oil it may soon be the largest one! However, the energy demands of the United States are so massive that they still need to import huge quantities of oil to make up for the difference! Other developed countries like Germany, Japan and the United Kingdom are also net importers of energy. In fact, they import more than two thirds of the crude oil that they consume. Countries like India and China have also become strategically significant in the past few years. The growing industrialization in these countries has also made their energy needs skyrocket!

Know The Producers

Countries in the Middle East and South America have massive oil reserves. The gulf region is considered to be strategic when it comes to production of crude oil. Saudi Arabia is the largest producer of oil in the world. Given the fact that Saudi’s own oil needs are very little, it exports more than half of its produce. Other gulf countries like UAE, Kuwait, Iran and Iraq also export large percentages of their crude oil production.

Russia has also emerged as a key oil exporter particularly in the European region. It is the largest exporter of oil to countries like Germany, France and United Kingdom. One would be surprised to know that even Canada is a significant producer of crude oil. Canada is the largest exporter of oil to the United States!

Also third world countries like Nigeria, Libya, Mexico and Venezuela have huge reserves of oil. These countries are also not exporters of oil. It is important to know that the economy of almost all of these countries is almost completely dependent on oil.

Know The Threats

The number one threat to the production of crude oil is geopolitical stability. Almost all the countries where large oil resources are present are in turmoil. Consider the case of the gulf region which has been in the state of prolonged civil war for over a decade. Also countries like Mexico and Venezuela have skyrocketing crime rates. This has a huge impact on the stability of supply. The geopolitical unrest makes supply of oil erratic. Therefore the sudden spikes and lows present in the oil market make the price extremely volatile.

Also many countries that have oil reserves sometimes indulge in questionable practices. This is because oil is such an important commodity that people who want to gain control over it are often ruthless and create a ruckus in the civil world. For instance, civil liberties in Iran have been severely curtailed as many powerful factions are fighting to gain control over the significant oil reserves. It is for this reason that United Nations and United States have levied sanctions on Iran. These sanctions have a drastic effect on the quantity of crude oil supplied.

The development of a new technique called fracking has also had a significant impact on the oil markets around the world. United States for instance has discovered that it has massive resources of shale oil. Therefore, some believe it is poised to overtake Russia and Saudi Arabia as becoming the largest producer of oil in the world. The development of fracking has assured buyers of uninterrupted supply of oil. Hence, the price of oil has fallen to almost one third of its peak price.

An oil trader needs to know all this information. They must look at the supply numbers very closely. The demand of oil is relatively stable and can be easily predicted. It is the erratic supply that causes the change in prices. Many organizations publish the daily production volumes of crude oil. Traders are the first to hop on to these numbers. The ability to interpret these numbers and use the information to trade oil has made many people rich beyond their wildest dreams!


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