Oil prices have been on a tear. In early June 2020, West Texas Intermediate (WTI) and Brent Crude Oil traded above $120 per barrel. There are several ways that an investor can express their view related to crude oil. One of those is to invest in crude oil stocks. Several types of equities benefit from rising crude oil prices. These subcategories include oil and gas producers, oil services companies, oil refiners, as well as integrated oil companies. Each category of companies performs differently, depending on where investors see oil in the crude oil cycle.
Oil Prices Might Continue to Rise
Oil prices have rebounded from the below-zero lows seen at the beginning of the pandemic to highs near $130 per barrel. The lows occurred in the wake of lockdowns that significantly reduced road and air travel. Producers shuttered their wells, considerably decreasing supply. The U.S. oil rig count calculated by Baker Hughes dropped from 680 active oil rigs in March 2020 to a low of 172 active oil rigs in August 2020. Over the balance of the subsequent two years, oil rigs have increased in the United States back to 574. Meanwhile, demand rebounded faster than supply, pushing the price of crude oil to fresh highs.
According to the Energy Information Administration, U.S. Crude oil inventories dropped to 414.7 million barrels, about 15% below the five-year average range. Another issue that is taking place is the lack of investment in oil infrastructure in the United States. Oil companies understand that the world is attempting to go greener. There is an investment in carbon-neutral energy products like solar, wind, batteries, and biofuels. According to the American Petroleum Institute, global oil investments have declined to record lows in 2021. The decline in investment comes as demand for petroleum is rocketing higher. Supplies have not kept pace with demand, pushing prices to elevated levels.
Oil Companies are Making Lots of Money
According to the Energy Information Administration, oil companies are experiencing robust cash flow. The increase in cash flow to operations results from higher crude oil prices. Additionally, proven reserves of crude oil and natural gas increased by 19.2 billion barrels of oil in 2021. Costs have barely increased while higher crude oil prices have increased revenues. The EIA reports that global exploration and development costs increased by approximately 1% year over year in 2021. If you are thinking about how to invest in crude oil in India, you might consider investing in CFDs of oil companies like WTI oil and Brent crude.
What are The Different Types of Oil Companies?
If you want to invest in the price of companies that produce, refine, handle, or even generate machinery that can generate crude oil, you might consider investing in crude oil stocks. Oil producers are at the heart of the industry. These companies spend capital to invest in oil production and exploration. They develop ways to find oil reserves and drill to see if they can tap an oil well and bring it to the surface.
Oil producers generally benefit from higher oil prices. The more they can sell at higher prices, the higher their earnings potential.
After the oil is produced, it is usually transferred to a mid-stream company that moves the oil. Oil is moved via pipeline, truck, rail, and ship. Mid-stream oil companies are thought of as toll companies. They receive a fee when oil is moved up or down a pipeline, like on a highway.
Another type of oil company is a refiner. Refiners take oil and convert it into products that consumers use. These products include gasoline, diesel, heating oil, and jet fuel. Refiners need to purchase oil from producers to make energy products. Refiners make money when the price of their products, like gasoline, heating oil, and diesel fuel, rises relative to crude oil prices. If the price of crude oil increases relative to other refined energy products, a refiner will lose money. A refiner is considered a downstream part of the crude oil process. Refiners usually have a marketing arm, the local gasoline station you might purchase from.
Before a producer can develop a well to produce crude oil, they need to purchase a machine to drill a well. After determining that the reserves they have found are worth drilling, they will need to purchase a rig from an oil service company. Oil service companies produce the machinery used to develop a drilling operation. As the price of oil rises, the day rates that an oil service company charges will also increase.
Each part of the oil production and refinement is specialized. Some companies called integrated oil companies can handle the entire process. Integrated oil companies produce, transport, refine and market oil to customers. Some of the largest companies, such as Exxon, BP, Shell, and Chevron, are integrated oil companies. These companies can benefit from higher oil prices, generating income when refinery margins are rising.
How to Trade Crude Oil
One way to take advantage of fluctuating crude oil prices is to invest in CFDs, or Contracts For Difference, in top oil producers. Crude oil producers develop and produce oil, and as prices rise they can sell their oil for higher levels generating more significant profits. However, CFD traders are able to take advantage of price movements in both directions, without the need to own the underlying asset.
Another oil group that benefits from higher crude oil prices is the services companies. As oil prices rise, this group of energy companies can raise their day rates for leasing their oil rigs. While oil services don’t directly benefit from higher crude oil prices, they can benefit from charging more based on higher prices.
Oil refiners can benefit if the price of refined energy products like gasoline and diesel fuel rises relative to crude oil. The mid-stream group can charge more to move oil when prices increase but don’t directly benefit from higher crude oil prices. One group that does it all is the integrated oil company. This type of oil company produces moves, refines, and markets energy products. Integrated oil companies can benefit from higher oil prices, but they have several business operations that can dilute their profits from higher oil prices.