Profiting From Oil – Peak or Not
by Tony D'Altorio, Investment U Research
August 14, 2009
It seems like the only times that the financial media talks about oil is when they mention either demand destruction in the United States or an inventory buildup of fuel, etc. in the United States.
The financial media is doing a real disservice to millions of investors in two ways.
The first is by ignoring the rest of the globe when it comes to demand for oil. For example, China imported a record amount of oil in July – 4.6 million barrels a day, up 42% from last July.
This record monthly figure is well above the previous peak of 4.1 million barrels of oil a day set in March 2008, when the financial media said that China was simply stockpiling oil ahead of the Olympics.
The second disservice the media is doing to investors is by completely ignoring the other half of the supply/demand equation – the supply of oil. The media fails to mention that oil supply is dropping three times faster than demand.
So, many investors will assume that all is well on the supply front for oil. This assumption is dead wrong and marks an opportunity for investors who drill a bit below the surface to get to the real story about oil.
Let’s take a look at the supply side of the oil equation and some easy ways for investors to profit from it.
The IEA Study
In this first-ever assessment of the world's major oil fields, the IEA concluded that the global energy system was at a crossroads and that consumption of oil was unsustainable, with expected demand far outstripping supply.
The study warned that the era of cheap oil has come to an end.
The International Energy Agency (IEA) is charged with the task of assessing future energy supplies by the OECD countries. The chief economist at the respected IEA, Dr. Fatih Birol, said that the public and governments appeared to be oblivious to the fact that oil is running out far faster than previously predicted.
Dr. Birol said that the world may be headed for an energy crunch because most of the major oil fields in the world have passed their peak production. He warned that global production is likely to peak in about 10 years, which is at least a decade earlier than most governments had estimated.
The IEA's first-of-its-kind study was a detailed assessment of more than 800 oil fields in the world, covering three-quarters of global reserves. The study found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace (6.7% vs. 3.7%) calculated only two years ago.
On top of this, there is a problem of chronic under-investment by both oil companies and oil-producing countries. This chronic under-investment has only been exacerbated by the financial markets turmoil and credit crunch of the past year. And not many investors recognize this fact.
Dr. Birol went on to say that even if demand were to remain steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030.
History is replete with examples of what happens when there are major shortages of key commodities such as oil. We may not see actual oil shortages for a few years, but investors should not wait to act.
Some investors may think that “green” investing is the way to go. Fair enough. Having “green energy” investments in your portfolio is probably a wise long-term move.
However, consider that there are literally millions of items that consumers use that are still made using petroleum. And there are still more than 60,000 manufacturing processes that depend on petroleum.
Yes, more and more manufacturing is occurring using “green” methods but it will probably take decades before the world can be weaned from petroleum.
Four Ways to Profit From Coming Oil Shortages
There are numerous ways for investors to profit from the scenario laid out by the International Energy Agency.
Here are four of them:
- United States 12 Month Oil Fund (NYSE: USL) – This exchange-traded security owns oil futures contracts on the nearest 12 months, equally weighted, that are traded on the NYMEX. It's an easy way to own oil futures without having a futures account.
- SPDR S&P Oil & Gas Equipment & Services ETF (NYSE: XES) and InvescoPowerShares Dynamic Oil & Gas Services Portfolio (NYSE: PXJ) – These exchange-traded funds offer investors broad exposure to the oil service industry, with 27 and 30 companies respectively. The services of these firms will be in high demand due to the years of under-investment in the oil industry.
- Petrobras (NYSE: PBR) – The Brazilian oil company is a rarity in the oil industry – it is actually adding vast amounts of oil and gas to its reserves. The unparalleled Tupi and Carioca oil fields along with the Jupiter natural gas field are a game-changer for the country and the company.
The bottom line is that the world will continue to be highly dependent on oil for many years to come. And investors should plan accordingly.