My apologies to my readers. I was taking the NY bar exam this week. What a week to take off writing about oil!
Today, crude hit a high of $128.60, mainly on the comments of Israel's Deputy PM Shaul Mofaz that Iran is headed for a "major breakthrough" in it's nuclear weapons program, and that such progress will not be tolerated. Mind you, Iran continually denies having such a program and maintains that it's nuclear program is for peaceful energy purposes.
Mofaz, may become Israel's next Prime Minister in next month's elections. He is widely considered the most hawkish candidate for the job.
So where do we stand with all of this? It comes down to whether or not Israel attacks the Iranian nuclear facilities. Remember, Israel attacked Syria's suspected nuclear enrichment plant last year. So they have a history. Iran however will not be as easy. It would take a major strike, in the neighborhood of 100 fighter jets to get to all the targets in Iran. It would not be a small operation by any means. It would be huge. If it happens, expect the price of oil to skyrocket.
OIL, TEXAS TEA, BLACK GOLD, ...
Crude oil and its price per barrel is now one of the most important economic indicators in the world today. Without question it affects the lives of every living person on the planet, and our world has become completely dependent on it. We are living through unprecedented times as wealth is being shifted on a daily basis to those nations that have the largest reserves of this natural commodity. These events are happening on such a grand scale, that if a person has patience and uses common sense, he or she could make money by betting on the direction of the price of oil and energy.
Background on Oil, Natural Gas, and Energy
Crude oil and its price per barrel is now one of the most important economic indicators in the world today. Without question it affects the lives of every living person on the planet, and our world has become completely dependent on it. We are living through unprecedented times as wealth is being shifted on a daily basis to those nations that have the largest reserves of this natural commodity. These events are happening on such a grand scale, that if a person has patience and uses common sense, he or she could make money by betting on the direction of the price of oil and energy.
Background on Oil, Natural Gas, and Energy
Oil is a fossil fuel, which means that it's formed from the fossilized remains of organisms that lived millions of years ago. In its natural form it's better know as petroleum. It can be found deep in the earth's crust, from 8,000 to 16,000 feet below the surface. Because it can take millions of years for petroleum to form, it should be considered irreplaceable for human purposes. i.e. Once it's gone, it'll never come back.
Natural Gas is often found with oil underground. Both natural gas and oil have high energy contents and are easily combustible. Natural gas is typically turned to liquid before being sold as liquified natural gas.
The top ten countries with the largest oil reserves (all figures are as of July, 2008):
Saudi Arabia - 260 billion barrels
Canada - 179 billion barrels
Iran - 136 billion barrels
Iraq - 115 billion barrels
Kuwait - 99 billion barrels
United Arab Emirates - 97 billion barrels
Venezuela - 80 billion barrels
Russia - 60 billion barrels
Libya - 41.5 billion barrels
Nigeria - 36.2 billion barrels
These numbers are self reported by the countries. Remembering that the higher up on the list that a country is the more influential they are in the world, which of those countries would you expect to give actual figures?
Ways to Invest in Oil and Energy
The price of a barrel of oil is determined by the forces of supply and demand. Crude oil is traded on the New York Mercantile Exchange, NYMEX. What is actually traded is a futures contract for delivery of 1000 U.S. barrels of oil at a fixed date in the future. What you see quoted in the news is usually the price per barrel of light sweet crude for the upcoming month.
Trading futures contracts is done on margin, is very risky and should be left to the professionals. The easiest way for the average investor to gain exposure to the oil markets is by buying and selling shares of an exchange traded fund, ETF, such as USO.
The United States Oil Fund, LP (USOF) can be thought of as a pool of money that invests in futures contracts for light, sweet crude oil, natural gas, and other petroleum-based fuels that are traded on the NYMEX and other worldwide exchanges.
You can also gain exposure through shares of an oil and gas company such as Exxon Mobile, XOM, or Royal Dutch Shell, RDS.A or Conoco Phillips, COP.
If the returns from these ETF's and oil companies is not enough for you. You can increase your risk as well as your gain and loss by buying listed options of the companies. An option is contract which gives the buyer the right but not the obligation to purchase shares (call option) or to sell shares (put option) at some time in the future for a specified price. Note that options, just like futures, are very risky and should be left to the professionals. It is common to lose all of your investment in options. The last statistic that I heard was the 75% of all options expire worthless.
Factors that Affect the Price of Oil and Energy
Supply and demand determine the price of petroleum.
Supply is generally determined by the countries that have the oil. The Organization of Petroleum Exporting Countries or OPEC is a group of twelve states, Saudi Arabia, Iran, Iraq, Kuwait, UAE, Venezuela, Libya, Nigeria, Qatar, Algeria, Angola, and Ecuador. OPEC is an oil cartel whose principal goal is the determination of the best means for safeguarding their interests, individually and collectively. Note that of the top ten countries with the greatest oil reserves, eight of them are part of OPEC. They collectively and individually set production goals, thereby keeping a tight reign on supply.
As for demand, the top five oil consuming countries in the world, the United States, China, Japan, Russia, and Germany, consume nearly 70% of the annual worldwide oil production. So when you see a slowdown in any of these countries, particularly the United States and China you can expect to see a drop in the price of oil all, other things being equal.
STAY ON TOP OF THE NEWS
Keeping abreast of what's going on in the world will greatly help you in your investment decisions. Much of oil and energy trading is based on common sense. You don't need a MBA or a Ph.D. in Mathematics. Just think of things in terms of supply and demand.
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