Oil is everywhere. Besides food items, it is a commodity that is used every day throughout the world, and is invested in by the billions every year as an opportunity to make and grow wealth.
Unlike food, however, it is perhaps the most maligned commodity in the world as well, not just for what is supposedly does to the environment but also the ways in which companies extract the commodity to put it into the market.
Most food comes out of the ground too, but we digress.
The Prevalence of Oil
Oil is not just about jet fuel and car fuel. Oil is even more prevalent than that, as much of it not only powers engines, but it is also used in cosmetics, some hair products, lubricants and building materials, just to name a few. In just one day, the world consumes about 87 million barrels of oil, which translates into 3.65 million gallons. Per day.
That is just the demand side. There is the supply side too, which is not entirely a zero-sum game. At least, it’s not in the current market, as prices are looking to find an equilibrium point since OPEC (the Organization of Petroleum Exporting Countries) cut back its daily production recently in order to send market prices higher.
The Supply vs. Demand Dance
Because so much oil is consumed each day, oil is arguably the most volatile commodity in the market. Oil essentially works on margin, meaning that prices will quickly spike or depress on any rumors of increased or decreased supply or demand, disruptions in transit or trade, and even economic factors having to do with various oil companies and their oil-exploration successes or failures.
With that as a backdrop, it makes perfect sense why the Keystone XL and Dakota Access pipelines have gotten so much attention int eh news and in the markets. With technologies allowing oil companies in the U.S. and Canada to extract more oil from the ground than was thought possible 20 years ago, there is a surplus of oil in the markets, and that drove prices down to levels that were not sustainable for many oil-exporting countries (we’re talking $30-$35 for a 42-gallon barrel at one point).
When that happens, some countries are forced to draw back the amount of oil they produce and export to other countries in the hopes of depressing the supply so prices will go up. They would much rather see more demand, but in the current environment they are seeing less demand partly because of increased domestic production of oil in the U.S. and Canada, which is collectively the largest region of the world in oil consumption.
In the Pipeline
One of the challenges of oil is getting the oil from the ground to refineries where it is turned into various oil products, such as several grades of jet and automobile fuel and lubricating or base oil for cosmetics, lubricants and even some cooking oils. Transporting oil can be a pricey endeavor, whether the oil is shipped by boat, train or truck.
Pipelines have become all the rage lately as a way to have oil extracted in North America and sent along a pipeline to refineries in the southern part of the U.S., where the finished products are then shipped to ports domestic and international. Pipelines take a large initial investment in permitting, environmental anf financial feasibility studies as well as construction, but over time they are expected to greatly reduce transportation costs and essentially provide more oil to the refineries and increase the supply in the market, which keeps the price affordable for consumers.
Oil as a commodity is volatile anyway, but it has especially ridden a roller-coaster with all of the stops and starts to Keystone and Dakota Access pipelines in recent years. As they say, time is money, and the longer these pipelines take to be completed, the more expensive oil becomes for everyone.
Investing in Oil
If you are looking for a commodity in which to invest a portion of your portfolio for the sake of diversification, oil may be a good choice if you don’t mind the volatility. As long as oil has been around in the market, it has never been worthless, but its price fluctuates on the tiniest of rumors of anything involving supply or demand.
If you want to invest in oil, never take a short-term approach. And pay close attention to companies involved in the oil industry, from production companies like Exxon Mobil to oil exploration equipment companies. As the market ticks upward, these companies will all benefit because increases in price means an increase in profit, as many operational costs stay relatively steady regardless of the supply or demand.
However, if demand continues to increase and a company decides to open more exploration, that company may see its stock drop because the profits that may be gained by higher oil prices will be spent on the expense of a new exploration that may or may not prove fruitful.
The Bottom Line
Oil is a commodity that is interwoven in all parts of the economy, as there are very few industry verticals that don’t consume some oil to operate. Paying attention to oil supply and demand notes that come out weekly can be a hint as to where to look to invest. But don’t look for a quick buck in oil; it’s far too volatile to really time the market and be able to jump in and out as you see fit. Ride out its volatility and see it smooth out over a long period of time. There is a supply in the ground that may last the world a couple of centuries, and while alternative energy sources are trying to gain traction in the market, oil will still be needed in many economies for the foreseeable future, so there will always be a reason to be bullish on oil.
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