Saturday, 1 August 2015

Oil Prices Have Affected Everyone, But What Exactly is Oil?

If you have been reading the news, you should know that oil affects most of us in some aspects of our life. For example, air ticket prices, car fuel, household gas prices, stock prices and many others.

You stay in a cave and you don't use gas to cook?

What if you stay in a cave and you are vegetarian? You will be surprised that animals and plants contain organic oil but we will not talk about it here.

In my earlier post on Keppel Corporation, I talked about how good Kepcorp was but affected by the oil prices. If you have read B's post on Developing The 5 Whys Technique In Investing, he used an example on KepCorp to explain the approach. He talked about the company's oil tolerance and sensitivity as the ultimate 5th Why. If you were keen to invest in any Oil and Gas companies, you will realised their stock prices were almost uniformly affected by crude oil prices.

So What Is Oil (Petroleum)? 

The name petroleum covers both naturally occurring unprocessed crude oil and petroleum products that are made up of refined crude oil. Petroleum is recovered mostly through oil drilling. It is refined and separated, most easily by distillation, into a large number of consumer products. These products include gasoline (petrol), kerosene, asphalt and chemical reagents used to make plastics and pharmaceuticals.

Oil Supply
  1. Conventional oil - cheapest and easiest to extract - around 1.8 trillion barrels
  2. Unconventional oil
    • Sand Oil - Canada and Venezuela have the world's largest deposit - 3.6 trillion barrels
    • Shale Oil - US has the world's largest deposit - 3.7 trillion barrels, though only a part of it is recoverable
The top three oil producing countries are Russia, Saudi Arabia and the United States. About 80 percent of the world's readily accessible reserves are located in the Middle East. 

Logistical and technical hurdles remain for unconventional oil. oil extraction requires large amounts of heat and water, making its net energy content quite low relative to conventional crude oil. Thus, Canada's oil sands are not expected to provide more than a few million barrels per day in the foreseeable future.

Oil Demand

World consumption was around 84 million barrels per day. Which in turn yields a remaining oil supply of only about 120 years, if demand remain static.

Due to its high energy density, easy transportability and relative abundance, oil has become the world's most important source of energy since the mid-1950s. About 90 percent of vehicular fuel needs are met by oil. Oil accounts for a large percentage of the world's energy consumption, ranging from a low of 32 percent for Europe and Asia, up to a high of 53 percent for the Middle East, South and Central America (44%), Africa (41%), and North America (40%). Top oil consumers largely consist of developed nations. I foresee developing nations will increase the consumptions of oil for future demands.

Factors Affecting Oil Prices
  1. Number of vehicles in the world competing for fuel
  2. Quantity of oil exported to the world market
  3. Net Energy Gain (economically useful energy provided minus energy consumed)
  4. Political stability of oil exporting nations 
  5. Ability to defend oil supply lines
Common Pricing Reference:
  1. West Texas Intermediate (WTI)
    • a very high-quality, sweet, light oil delivered at Cushing, Oklahoma for North American oil
  2. Brent Blend
    • comprising 15 oils from fields in the Brent and Ninian systems in the East Shetland Basin of the North Sea. The oil is landed at Sullom Voe terminal in Shetland. Oil production from Europe, Africa and Middle Eastern oil flowing West tends to be priced off this oil, which forms a benchmark

Oil Production:




During the 1979's oil peak, its production declined for years and took almost 20 years to return to 1979's high.

Daily Life Observations

  1. Oil industry has been lucrative. How often we heard our friends getting 6-12 months bonuses working in the industry?
  2. Singapore shared same currency standard with Brunei. Brunei is ranked fifth in the world by gross domestic product per capita at purchasing power parity. The IMF estimated, in 2011, that Brunei was one of two countries (the other being Libya) with a public debt at 0% of the national GDP. Forbes also ranks Brunei as the fifth-richest nation out of 182, based on its petroleum and natural gas fields
  3. Oil prices affect our utility bills, car fuel prices and air ticket fuel charges
In Summary

If you are to invest in Oil and Gas companies, you may really need to hold for many years (5-10 years?) to see through the bottom and back to the peak. Even oil prices remain at current rate for decades, the demands have always been there and increasing. There are plenty of surplus supply for the near future and that caused the oil prices to be depressed. It is of interest like usage and business costs for oil prices to remain low. However, it is also of interest to OPEC and oil exporting countries to increase the oil prices for countries' prosperous and survival. 


Benefits to invest in Kepcorp:
  1. Kepcorp has proven track records of dividends of >5% that sat through major crisis
  2. Kepcorp has strong balance sheet to sustain for years
  3. Kepcorp are co-owned by impressive investment holdings
  4. Kepcorp is top 8th company listed in Singapore stock market by market capitalisation 
Disadvantages to invest in Kepcorp:
  1. This is a volatile stock. If you have a weak heart, please avoid it
  2. Depressed oil prices for the longest time could weaken the company prospect
  3. Lag of few years to see the effect of rebuilding oil contracts
  4. Oil issues are environmental-unfriendly. Although it has been discussed for decades, there could be a breakthrough on other energy resources that could be equally or better efficient.
The price is very attractive but is it worth buying? Is there any other stocks with same returns but lesser risk/unknowns for its future?

Frugal Daddy

*Majority of the data was extracted from wikipedia and some of them were between year 2010-2015. Please take it as reference and not investment decisions.

7 comments:

  1. Hi Frugal Daddy

    Thanks for the mention :)

    Great post here, I think the oil industry is a hotly anticipated debate right now and investors who are interested needs to take into account the huge potential blood on the street scenario. At this moment, I think it's pretty premature to think that Keppel is a good buy that will go back to its $11 or $12 in a year or two time.

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    1. Hi B

      Thanks for sharing your views on KepCorp. It is good to have a 2nd opinion. I agreed that we should not bet on share price going up to $11 within a short 1-2 years. One should consider other factors too. However, there is a good chance it will bounce back strongly after a few good months of good news. It could take many years to happen though. :)

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  2. Hi FD,

    I like the fact that you go back to the root, which is the definition of Oil. How many of us will go back to the most basic. *Clap* Clap*.

    As I emailed you before, Kep Corp today is not just an O&G related company, but their O&G segment still carry a heavy weight in its top/bottom line. Honestly I do not think Kep Corp is a volatile company. It has created lot of value for its shareholders over the years. It is without doubt a good company to own.

    Like I just commented on B's page, the questions of worth or not, is related to when you intend to sell? And how do you decide your entry point!

    Life is strange, if you decide to buy now at >7.5, then later drop to 6.5, some people will tell you "Neh..I already tell u its too premature to buy, you should have wait....!"
    But maybe another scenario, you decide to wait until 6.5, but by then, maybe you do not have enough bullets to buy (since other better opportunity). Then later when it go up >8.5, you start to say "aiyah wasted!"

    After your research, it's better to follow your inner voice and gut and then do it through and no hold back and no regrets later.

    Don't follow the so call experts or top bloggers... Not Me definitely..Maybe Not even B.....haha Sorry B - No offence!

    Hence, I deduce that for a true successful investing, we need to 1) learn about philosophy and experiences of life 2) Technical / FA which is frankly not that difficult to learn if you really want 3) Learn about Business! (this is difficult cos most of us here lacks the experiences).

    Now you look at all the top investors, like our most loved Warren Buffett...Does he have the above?

    Just my two cents. Do not bombard me.....Ahhhh...... hahaha

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    Replies
    1. Hi Rolf

      I am glad you come forward since you are the o&g expert. Lol

      I have to say it is a volatile stock compared to most blue chip. I ever tried to buy and sell kepcorp in a month and gain > 10%. I have seen similar price movement since 2010 for kepcorp. Unless my definition of volatility differs from yours. Haha

      I fully agree with your point not to follow blindly. Else, I will not write 2 posts on Keppel corp in a month. Haha.

      I did applied ta and fa, but in my unorthodox ways that made sense for me. Have much room for improvement. Else, I will be busy counting money. :)

      I felt learning business is something I have challenges on. I am always fascinated by bloggers who can write on business situation. Bravo.

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  3. For the mid- to long-term I am long in Alternative Energy like Solar, Wind and Nuclear too (still the safest large scale energy source around, despite what the media is telling us) and short in all O&G related investments.
    The oil-age is over. Ok, not right now or tomorrow. But in 10+ years.
    Is anybody with me on that view?

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    Replies
    1. Hi Andy

      Seriously, I have no idea how oil will be replaced in short term but it is possible in 10 years or more. I suspect it will stay relevant just that oil price will be moderate.

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  4. Thank you kindly for this great post. I was not aware of a lot of these factors. Showed my wife this morning and she was also shocked. I really hope that it does not effect us too much in the long run. We rely heavily on the fuel price as my business is in freight but thank you for this.

    Abraham Yates @ Apache Oil Company

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