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hi i'm jimmy in this video we're going
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to look at what's been happening in the
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oil markets
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to see if we can find any long-term
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investment opportunities
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and hopefully we can use this
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information to
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improve our investment portfolio and
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ideally get us closer to our goal
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of achieving financial freedom okay so
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let's jump right in so the first and i
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believe the most important thing
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is for us to understand the basics of
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how the oil markets work
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and i'll keep this super quick and easy
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so we can break the oil industry
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into three main segments we have
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upstream
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midstream and downstream upstream is
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where they get oil and gas out of the
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ground
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midstream is where they ship it and
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store it and then downstream is where
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they refine oil
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and ultimately sell it to whoever the
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end user is
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so upstream makes more money if oil
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prices are higher
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midstream well they generally get paid
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based on volume
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so they probably care the least about
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the actual price of the commodities
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they're where they really ultimately
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care about volume so how much is the
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demand and how much is being supplied
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and then downstream is generally looking
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to buy oil as low as possible
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and sell it for let's say gas price when
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gas prices are as high as possible so
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they make more money when the spread is
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larger
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so that's the basics and this is a chart
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of oil going back the past five years
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and we can see that when covet happened
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last year well
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the oil prices tanked which makes a lot
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of sense because ultimately
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demand around the world really dried up
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and as demand has come back well we can
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see prices recently
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have shot up now it's not quite as
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simple as gs demand there are other
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factors to consider
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but demand is certainly one of them and
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i think our last takeaway from this
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from an investor standpoint is who
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ultimately benefits
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from higher oil prices well the first
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and probably the most obvious answer
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is oil and gas exploration companies
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companies like
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exxon bp and chevron are all good
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examples
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of diversified companies that have large
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exploration businesses
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and since exploration companies make a
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higher profit when
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oil prices are higher well these
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companies should benefit and another
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reason that oil prices have gone up
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recently
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is opec recently came out and said that
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they were reducing
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production so we can see that when we
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look at opex production going back the
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past five years
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well we can see that this little dip
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right here well this is as
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opec has turned down how much they're
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going to be producing so we end up with
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less supply which is visible here
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and increasing demand which is happening
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as we know as covert restrictions are
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being lifted
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and we already saw what happened to the
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price of oil in reaction to all of this
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now on top of opec well the united
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states actually produces a decent amount
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of oil as well
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and we can see that this is a chart of
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u.s oil production going back the past
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20 years
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this comes out of the u.s energy
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department i believe and clearly
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we can see that there was a decent drop
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as
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covid hit the world there was a decent
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drop in the amount of production
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happening
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and that's expected to gradually come
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back now i just want to bring out two
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quick points
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first is that if you look this data up
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online you can find this
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on the eia's website and ultimately
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there's a couple different numbers that
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they report some of them which show
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higher production levels than this well
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that includes
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things beyond oil uh it includes a lot
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of biofuels things like that
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so there's more than just this being
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produced but i just want just the oil
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numbers and
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second when i'm doing my analysis i try
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really hard
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to focus on the numbers and try not to
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get too
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emotionally involved with an investment
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positioning or
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my reasoning behind an investment i once
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heard
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warren buffett say that it doesn't
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matter what other people
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whether or not other people agree with
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you i think the quote wants something
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like
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you're right because your facts are
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right and your reasoning is right
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that's the only thing that makes you
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right and if your facts and reasoning
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are right you don't have to worry about
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anybody else
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and i bring this up because i try to
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remember this whenever i'm researching a
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a topic or a company that is you know
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highly politicized and i'm not a big fan
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of politics personally
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but i get that politics play a big role
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in many industries
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and i doubt that there's many other
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industries out there that are more
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driven by politics than the energy
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industry
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but i've seen a few investor comments
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talking about now that democrats are in
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the white house
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well oil production is going to plummet
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and these comments went on to say that
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because that's going to happen well
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therefore anything around
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oil investments are a bad thing and i
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frankly i think this is a very silly way
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of looking at it
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sure democrats tend to be more against
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big oil than let's say republicans are
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but even that is a very tricky and wide
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casting comment
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to make just look at the past 20 years
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as an example
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these early years here while there was a
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republican in the white house
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then a democrat took over and then once
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again a republican took back over
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point being the facts show that
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production
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can go up no matter who is in office
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there is far more
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than just politics there is many demand
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and supply factors
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that influence what is happening is from
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a production standpoint so i just want
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to warn us against making any
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blanket statements like that without
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first looking through the facts and
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reasoning the whole thing up
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okay now with that being said let's look
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at the average price of gasoline
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so this is data put out by the american
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automobile association and we can see
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the gas prices at the pump
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have been going up fairly quickly in
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2021 and even at the tail end of 2020
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so in theory that could be a good
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investment opportunity
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but to really see if there's an
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opportunity in
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higher gas prices we want to look at
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something known as the crack spread
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so the crack spread measures the
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difference or the spread
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between how much a company pays for oil
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and how much they pay for the products
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that oil produces now there are all
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different types of crack spreads out
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there
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i'm using the nymex wti cushing
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321 crack spread nymex is the exchange
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that this metric trades on wti
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is this is talking about oil coming out
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of west texas
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cushing is the location that we're
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measuring
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these particular prices prices are
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different all over the world this is
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measuring it out of cushing oklahoma
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which is actually a crucial spot
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in the oil world since many pipelines
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all converge right in cushing oklahoma
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so there's a ton of oil activity there
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and then the three two one looks at how
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many barrels
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are being converted into end product for
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three to one it's actually
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three barrels of oil are being processed
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into
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two barrels of gas gasoline and one
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barrel of distillate fuel that's what
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that three two one means
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an example of distillate fuel would be
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something like diesel fuel now when we
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look at the chart itself
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well we can see that yes there was in
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fact a jump in the crack spread
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which implies higher profit margin
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potentially higher profit margins
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for downstream companies but we may also
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notice that this jump
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was not quite as dramatic as the jump we
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saw in oil prices
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which perhaps tells us that oil jumped
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higher jumped at a faster rate than
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gasoline prices did
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since in this case well oil prices are
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the cost
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to downstream companies while gasoline
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is what they're selling it for
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so the crack spread is ultimately giving
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an idea of how big the profit margins
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can be
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okay so this brings us to some tentative
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investing ideas
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so i think that there could be some
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money made in the upstream companies oil
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prices are moving higher so there could
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be some profit potential for us there
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midstream companies tend to be one of
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the more stable investment opportunities
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out of all
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three oil segments because what they do
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is they transport the oil
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and they care less about the price they
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really care about the volume being
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transported
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plus many of them are structured as
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master limited partnerships or mlps for
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short
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and a lot of those companies pay out
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very big dividends since they get some
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tax advantages for paying
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higher dividends so if we like dividends
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that could be an interesting play
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and then finally we have downstream now
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i think downstream i'm slightly less
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optimistic about
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because the crack spread hasn't moved
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quite as high as some of the other
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things
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but of course that could change so i
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think it could make sense
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to focus on some of the large companies
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companies like chevron or exxon
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because that gives us a fairly well
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diversified portfolio as far as exposure
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to these three segments
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now i'm sure we're all aware that the
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real question is not necessarily
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where gas and oil prices are today but
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where they're going
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and i think that there's a good chance
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that oil prices could
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at least stay the same perhaps move
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higher since opec
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has kept production slightly lower than
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they were before
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which helps restrict supply plus covid
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restrictions around the world should
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gradually
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uh loosen let's say and more
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more people should go out in in theory
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by gasoline and have a bigger demand for
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oil so if we want a diversified company
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chevron exxon could make sense if we
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want high dividends our yeah high
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dividends are high yield companies they
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could go after mlps they might make a
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lot of sense as well
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another opportunity another option is to
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go with an etf there are etfs
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spiders have etfs for each of these
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three main segments
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so that could be a logical place to go
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if we
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think that one segment has a better
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opportunity than others
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i might lean towards midstream or you
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know i would probably
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look for something diversifying amongst
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all the sectors so for me
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i think it if we want to be invested in
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oil at this point i think it makes sense
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to stay with a well-diversified etf and
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if we believe that oil prices will keep
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going higher
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maybe we could take a shot with a more
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speculative position
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and look at something like the united
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states oil fund
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their ticker symbols uso that's a etf
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that ultimately tries to
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you know they invest in oil they invest
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in oil futures contracts
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so if oil prices keep going up well
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there could be good profits to make to
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be made there now they're also
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actually one of the few etfs that i did
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an analysis video on i've done analysis
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videos on many companies
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but this is an etf analysis video that i
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did
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so if you're curious to learn more about
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how this etf works
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and how some of the nuances of this etf
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perhaps that's a good next video for you
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to watch i'll get a link right here i've
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got a link in the description below
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and thank you so much for sticking with
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me all the way to the end of the video
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i really appreciate it thanks and i'll
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see in the next video
