SHOULD YOU INVEST INTO THE OIL INDUSTRY?
(Watch the full youtube video below!)
The recent global issue caused a mass number of international travel restrictions and thus a drop in global oil demand! This in turn sent the oil share price plummeting.
So is now the greatest time to be investing into bargain oil stocks or is the future of the oil industry over??
In these video I’m going to explore these questions and explain how I made £1000 profit in just 7 days.
LETS DIVE IN!
Short term oil prices are dependent upon market Sentiment & relationships between the major oil providers such as Saudi Arabia, Russia and the USA.
However, in the long term Oil prices are dependent on 3 things, SUPPLY, DEMAND and COSTS of extracting and shipping the oil.
GLOBAL OIL DEMAND GRAPH –
Developing nations will demand more oil in the future.
“Over the next 25 years, the world will need an additional 25 million b/d of oil.
Or an Incremental combined U.S and Saudi Arabia Worth of new production.
Demand Growth 1-2% per year.
SHORT TERM OIL PRICES:
The number of oil rigs in the USA and Canada have increased massively.
Thus this excess increase in supply and a temporary drop demand due to the global demand has caused OIL PRICES to plummet.
Thus the risk for investing in oil include.
Risks:
- Increase in Supply (New Rigs, USA)
- Oil production costs (Shale oil & smaller producers may have higher operating costs)
- Disruptive technology such Electric Vehicle technology.
- Renewable Energy (Be Conscious of this in the next 10-15 years) and how it will affect oil prices. (Growth at 20-30% per year) (Renewable generation accounts for >50% of power supply post 2035.
- The Consensus is gradually turning against oil & fossil fuels.
- More Recycling less new plastics required.
Thus to mitigate these risks and still make good returns we need to invest in oil stocks using the Warren Buffett method of selecting companies which are below market value and thus have a margin of safety.
POSITIVES: Gas is the only fossil fuel which grows it’s total energy demand until 2035.
(Thus looking for companies with large exposure to gas production is useful)
Oil Prices & Production costs:
All the Large & small Oil producers are investing lots into OIL production. (Graphs of oil company investments)
These number of investments in production will create lots of supply, in addition to all the new technologies which could potentially disrupt the industry.
Thus due to only a 1-2% increase in global demand. It is essential that you PURCHASE OIL STOCKS at BELOW MARKET VALUE when SENTIMENT IS BAD to ensure great returns.
Exxon Mobile is still very profitable of at $40 a barrel. So that is why investment continues in oil production.
At just $25 a barrel many oil production projects will still break even.
It’s clear that the larger oil companies are preparing for lower oil barrel prices.
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The Latest Market Crash & Global Drop in Demand.
Due to the latest market crash and Lockdown of all transport there was of course a global drop in demand.
So OPEC (Oil Producing & exporting countries) met up in Vienna to discuss how they should stabilize oil prices by reducing the production and not going into a price war!
The idea was to get all countries to agree on a price floor.
So each country can decrease production by 5% but the price may shoot up by 15%. Thus the country actually ends up being more profitable.
Demand is currently at: 100 million barrels per day
Supply is currently 1-3 million barrels greater.
However, RUSSIA said they are not agreeing to the price floor initially.
And Saudi Arabia wished to increase it’s production to 10 million barrels per day.
SAUDI ARABIA HAS VERY LOW PRODUCTION COSTS THUS IS STILL PROFITABLE EVEN WHEN OIL PRICES ARE LOW.
ROACE is 41% (2018)
Return on average capital employed.
Saudi Aramco margins are 30% of net income while shell is happy to get 5%.
THE GOOD NEWS IS SAUDI ARABIA and RUSSIA have finally agreed to cut Oil production costs.
This caused the price of CRUDE oil to decrease initially by over 20% then by over 50%
WTI crude western hemisphere.
https://oilprice.com/oil-price-charts
Currently at just $22 a barrel! Previous high of $60 a barrel.
OPEC is trying to keep the price floor at around $40 a barrel.
This price swing has been further enhanced by USA oil & gas production going from 8 million barrels to 15 million barrels per day.
1 Barrel of oil is 42 barrels.
5.32 (Graph of US Oil production.
In 2010 – The US Industry learned how to start drilling horizontal oil wells & implement fracking.
This allowed the USA to double production in the past 10 years!
When Oil prices hit $80 a barrel a few years back every US company started increasing oil production.
Many US companies were taking on a lot of debt to increase production.
WHAT DOES THAT MEAN For Investors?
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Invest in oil stocks with LOW DEBT
You should also stay away from companies with a large amount of debt as they may not be able to recover those loses with the oil price so low.
Many people got burned by investing into small startup oil companies which were massively Overleveraged. As they took on this debt with the same drilling margins and oil prices at $80 a barrel but then as oil prices plummeted they got stung.
Many will be actually losing money with oil prices at this level.
Look for LARGE GREAT companies with sound fundamentals, steady cashflow, Capital Discipline and invest the highest margin barrels.
Companies such as Shell, BP and Exon are some of my favorites. They will also be able to acquire these small oil production companies at a low cost.
BP, Shell and Exxon will also be selling off bad assets to reinvest that money into more efficient oil operations.
As an investor you need to look for opportunities to invest when short term market sentiment is bad and thus you can invest with a large margin of safety and get great returns.
I proved this concept during the LATEST market crash.
investing in the large Oil giants such as Royal Dutch Shell and BP at rock bottom prices and saw a 70% ROI in just 7 days and made £1000 profit of a very small investment. (SCREEN CAPTURES BP and SHELL)
