With vast opportunities for growth in established and emerging markets, some believe this may be a good time to get involved in investing in oil and natural gas. With that in mind, Investing News Network has put together a brief guide to opportunities in the dynamic oil and gas industry.
How to Invest in Oil and Gas: Understanding the Oil Industry
The oil industry has been a powerhouse for decades, but has recently undergone rapid change.
In 2018, the United States overtook Saudi Arabia for the first time in two decades to become the world’s largest producer of crude oil with 17.9 million barrels per day (bpd). In 2019, that figure rose to 19.5 million b / d, although it fell to 18.6 million b / d in 2020 due to a slowdown in operational activities caused by the COVID-pandemic. 19.
The US Energy Information Administration predicts that global oil consumption will average 97.5 million bpd in 2021, an increase of 5.1 million bpd from 2020.
Of course, the COVID-19 pandemic has had a significant impact on energy markets, especially oil. “Oil is hit the hardest by this shock due to reduced mobility and aviation, which account for nearly 60% of global oil demand,” says a 2020 report from the International Energy Agency. energy.
In its outlook for the oil and gas industry for 2022, Deloitte looks back on the strong rebound in the oil and gas industry in 2021, noting that oil prices have reached their highest level in six years. Going forward, the company sees volatility return to the oil and gas market and states that the oil and gas companies that perform well under these conditions will be those that can “reinvent themselves by practicing capital discipline, by focusing on financial health, by committing to climate change and transforming business models. “
While some may worry about the future of the industry as electric vehicles become more ubiquitous, market watchers should keep in mind that crude oil is used to produce petroleum, which has a number of widely used applications. These include the production of diesel and fuel oil, jet fuel, petrochemical feedstocks, waxes, lubricating oils, and asphalt, all of which are essential in today’s world.
How to invest in oil and gas: oil futures, options and ETFs
Since the oil industry is so profitable and boosts so many economies, investors interested in the space can get involved in a variety of ways, including futures, options, and exchange traded funds (ETFs). Understanding the risk and reward potential associated with these investment methods is essential.
Futures are financial derivative contracts that require the parties involved to trade an asset at a predetermined future date and price. This direct investment tool is highly volatile, subject to extreme risk, and requires a large initial investment, which means oil futures may not be suitable for everyone.
A few oil futures offered on the New York Mercantile Exchange (NYMEX) are: mild light crude oil, Brent crude, E-mini crude oil, Crude Oil Volatility Index (INDEXCBOE: OVX) and RBOB gasoline.
Options offer a bit more stability than futures because the holder can choose whether or not to sell.
According to Investopedia, crude oil options are the most traded energy derivative on NYMEX, one of the largest derivatives markets in the world. It should be noted that futures contracts, and not crude oil itself, are the underlying asset of these options – which makes oil options essentially options on futures contracts.
For investors looking to mitigate risk and reduce the amount of capital required to invest, ETFs are a viable option. ETFs are essentially a basket of various securities or stocks; they allow investors to spread their capital across a range of companies, thereby reducing the effects of market volatility on the value of the ETF.
Some ETFs available to investors include the iShares Global Energy Sector ETF (ARCA: IXC), United States Oil Fund (ARCA: USO), United States Brent Oil Fund (ARCA: BNO), Energy Select Sector SPDR ( ARCA: XLE), the United States 12 Month Oil Fund (ARCA: USL), the Invesco DB Oil Fund (ARCA: DBO), the United States Gasoline Fund (ARCA: UGA) and the SPDR S&P Oil & Gas Explore & Product ( ARCA: XOP).
How to invest in oil and gas: what about oil stocks?
Beyond futures, options, and ETFs, investors may want to look to traditional oil stocks, which allow direct investment in oil exploration, development and production companies.
Oil stocks that offer strong dividend options and have high liquidity include ExxonMobil (NYSE: XOM), BP (NYSE: BP, LSE: BP), ARC Resources (TSX: ARX) ConocoPhillips (NYSE: COP), Suncor Energy (TSX: SU, NYSE: SU) and Chevron (NYSE: CVX). As for which small-cap oil stocks investors should watch out for, check out the Investing News Network’s analysis of major oil and gas stocks on the TSX and TSXV.
In mid-2021, Oiluka’s Alex Kimani offered a few oil stocks for investors. Kimani suggested investors look to Marathon Oil (NYSE: MRO), Northern Oil and Gas (NYSE: NOG) and Devon Energy (NYSE: DVN).
There is of course a risk associated with investing directly in listed companies. It is crucial to understand whether the company has gone into production or whether it continues to drill and explore. The type of project is also important, as traditional production is very different from hydraulic fracturing.
Partnerships are also rife in the industry, so investors need to know if a company owns its project exclusively or is part of a joint venture.
How to invest in oil and gas: gas ETFs, futures and stocks
Many oil-producing companies also produce gas; therefore, oil and gas investors have many of the same options. Even so, natural gas is its own commodity, and there are investment ideas specific to gas. For example, according to the ETF database, the most popular natural gas ETFs are the United States Natural Gas Fund (ARCA: UNG) and the ProShares UltraShort Bloomberg Natural Gas ETF (ARCA: KOLD).
Those thinking of natural gas futures should keep in mind that these contracts are very liquid and extremely active throughout the week. The most intense natural gas futures trading typically occurs on Thursday after the release of the U.S. Department of Energy’s weekly natural gas storage report.
Major natural gas futures contracts include NG Henry Hub natural gas futures, QG E-mini natural gas futures and delivered natural gas futures.
Investing directly in companies active in the natural gas market is also possible, but it is difficult to find companies exclusively producing natural gas. That said, some large companies heavily involved in natural gas include Suncor Energy and Devon Energy.
How to Invest in Oil and Gas: Key Takeaways for Investors
When researching potential investment opportunities in the stock market, a company’s net worth, market capitalization, historical stock price, income, and cash flow should all be considered.
A financial advisor can also provide insight into companies or jurisdictions that may offer tax incentives to potential investors in the oil and natural gas market.
Whether you choose to invest in publicly traded oil and gas stocks, ETFs, futures, or options, the energy sector is worth exploring as it looks set to continue to grow alongside demand. growing.
This is an updated version of an article first published by Investing News Network in 2019.
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Disclosure of Securities: I, Melissa Pistilli, do not hold any direct investment interest in any of the companies mentioned in this article.