Investing in Oil

March 8, 2010 Investing/Trading

As oil in developed countries such as the United States and Canada became harder to find and less profitable, oil companies moved offshore, to Alaska and to the Third World. Investing in oil has been subject to the risk of nationalization across the globe. In general it has become harder to make money in oil. That makes fundamental analysis of oil companies more important than ever. Investing in oil companies that are more efficient is more important than in decades past. Efficiency in exploration, production, and distribution are all the more important because of the slow economic recovery.

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Investing in oil holds many similarities to investing in gold. Both commodities are plentiful but not easy to reach or cheap to bring to market. Thus the profit is in the details to paraphrase an old saying. Russia was said to have depleted its oil reserves until the fall of Communism and the entry of Western oil companies and their technology. Injection of water to maintain reservoir pressure has raised Russian production substantially to where Russia ranks ahead of the USA and only behind Saudi Arabia in total production. Picking new winners when investing in oil will mean finding the companies that are finding new and efficient means to bringing and keeping oil fields on line to obtain maximum output.

These are 2008 figures for production by country for all nations producing more than a million barrels a day.

Saudi Arabia
Russia
United States
Iran
China
Canada
Mexico
United Arab Emirates
Kuwait
Venezuela
European Union
Norway
Brazil
Iraq
Algeria
Nigeria
Angola
Libya
United Kingdom
Kazakhstan
Qatar
Indonesia

10,780,000
9,810,000
8,514,000
3,795,000
4,174,000
3,350,000
3,186,000
3,046,000
2,741,000
2,643,000
2,538,000
2,466,000
2,422,000
2,420,000
2,180,000
2,169,000
2,015,000
1,875,000
1,584,000
1,429,000
1,208,000
1,051,000

Depending upon your definition of politically unstable from 7 to 11 of these countries fit. Political instability carries the risk of nationalization it has not already happened and full scale shutdown in situations like Iraq after the second invasion. Stock investing in oil also includes companies that support an oil industry increasingly dependent upon higher levels of technology. Companies that make the robots able to dive to great depths to make repairs on aging oil rigs tend to do well when a hurricane moves through the Gulf of Mexico.

A very promising and technically difficult find makes the point about going to great depths to find oil. BP Group with Brazilian partners is drilling test wells in the Santos Basin off the coast of Rio de Janiero. The oil lies under 6,000 feet of water and another 9,000 feet of a “sub salt” layer. Three basins identified in this area are estimated to have 30, 12, and 33 billion barrels respectively. Experts are not certain about just home much is recoverable with current technology in parts of these fields. When you should invest in the stock market for oil used to be when a brand new big field was discovered. Today it may be wise to see how fast technology comes to line to recover oil from previously unheard of depths. The bottom line will be the bottom line. How profitably can companies extract the oil?