The coronavirus has caused more than 150 countries to shutdown their economy to fight against the virus. This has caused the stock markets around the world to drop the fastest more than any time seen in past history. What has also cause the steep drop in stock markets around the world is the drop in the price of a barrel of oil.
On Friday March 6, 2020 the price of a barrel of United States crude oil was $41 dollars a barrel. In the US oil is traded under the West Texas Intermediate light sweet crude (WTI) and the world oil is known as Brent Crude light sweet crude (CL=F) that are easily refined into gasoline. Both are traded under commodities under futures & indexes. Also we need to mention OPEC that stands for Organization of the Petroleum Exporting Countries. They are made up of 14 countries of the world major oil exporting nations. The organization task is to unify their members and insures the stability of the oil markets.
After the stock markets dropped by a substantial amount since the beginning of March on Sunday evening on March 8, 2020 in the news around the world it was announced Saudi Arabia and Russia started a price war on the price of oil. Neither country would agree on dropping the production of oil supply. It was said it was done to potentially drive the price of oil down per barrel to stop American drillers from producing oil and hope they would fall into bankruptcy. What has happen is both Saudi Arabia and Russia have continued to produce oil without dropping the production of oil even though there is no demand due to the coronavirus. The price of a 42 gallon barrel of oil continued to fall. Although while writing this article President Trump spoke with both countries and there is hope that on Monday April 6, 2020 the two counties are meeting along with OPEC to discuss reducing the production of oil and the price of both WTI and Brent crude has recovered by more than 30%. Below is a chart of the price of both types of crude oil over the years. The yellow line is the price of West Texas Intermediate and the blue line is the price of Brent Crude from 1988-2020. On April 3, 2020 the price of WTI oil closed at $28.34 and world Brent crude closed at $34.11 per barrel.
The amount of oil consumption per year has been dropping since 2005. For example Americans have been fighting back against foreign oil. The supply drop started before the new US oil companies invented fracking. Americans started buying electric, hybrids and low gas mileage cars and trucks for years. Before the trade war against China and the US, China economy was roaring and caused oil to spike in value greater than 100 dollars per barrel. Gasoline prices were over 4 dollars a gallon. To help lower the price of oil in the 1970’s US farmers started using their crop of corn to produce ethanol to add to oil to help reduce the price of oil.
To understand the oil sector we need to understand the definition of petroleum. The definition states petroleum is a fossil fuel, made from decaying prehistoric plant and animal remains. It is a mixture of many different hydrocarbons molecules containing hydrogen and carbon that are formed sometimes as a liquid (crude oil) and sometimes as a vapor (natural gas). Source: Energy Sources|Energy4me
The US invented a new process for drilling oil called fracking into shale rock. The simple way to understand the US fracking industry drillers use to drill oil and gas wells in the vertical motion but the new fracking business for oil wells that dried up drill in the horizontal motion. It is important for an investor to know about the invention of fracking because it has made the US one of the largest providers of oil and gas.
There are different ways of investing in a barrel of oil through the futures markets that can be risky and is not how we at CFE Finances are educating our investors so we would recommend investing in different types of oil companies. We are not recommending any of these stocks but you could invest in a refinery company, companies that provides the pipelines of oil and gas throughout the US or actual companies that produce oil and sell the oil. For example HollyFrontier (HFC) is a US refinery that produces different types of fuels such as gasoline, diesel fuel, jet fuel, specialty lubricant products and asphalt. As writing this article their stock is trading at $22.38. Phillips 66 (PSX) is another refinery in the US. Their stock price is 51.62. The goal of refineries is to purchase crude oil at a lower-cost so they can refine at higher margins. So it helps refineries when there is difference in price between WTI and world Brett crude oil.
Another type of oil investment is a MLP that stands for master limited partnership that means the company pays 90 percent of there earning back to shareholders in a quarterly dividend. Energy Transfer LP (ET) is a master limited partnership that provides energy-related services. Another company Kinder Morgan Inc. (KMI) is a company that use to be a master limited partnership that changed their business to a corporation so they no longer need to give shareholders 90 percent of there earnings. This allows the company to lower their dividend payout so they could invest there money into growing their business but this change drove the price of the stock down because shareholders were not happy about it. Kinder Morgan owns and operates pipelines of natural gas and crude oil throughout the US. Kinder Morgan along with Holly Frontier, Phillips 66 and Energy Transfers stocks has dropped substantially from their yearly highs.
Other companies that you could research in the oil and gas sector and payout healthy dividends are Chevron (CVX), Exxon Mobil (XOM) and ConocoPhillips (COP). These stocks have also dropped by a substantial amount from their highs. Also there are plenty of others. If you did have a question on a particular company we can help you with your research.
As investors we will continue to keep an eye on the different types of oil stocks watching the continued volatile to see how they affect the future of investing. We at CFE Finances review different industries when we realize how they could be a good future investment as well as how they effect our investments. The volatility in the oil sector will continue to be watched due to how important it is for all countries economies.
As finishing this article on April 5, 2020 Sunday evening it was mentioned on CNBC news oil indicates it will drops 9% when market opens on Monday due to OPEC meeting along with Saudi Arabia and Russia has been delayed until next Thursday April 9, 2020. Be sure to watch the market this week.
Good luck and happy investing from CFE Finances! Stay safe and healthy. We will be in touch with another newsletter soon. If you have any questions or concerns email us from our contact page.