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Despite energy stocks having a rough go over the last few years, the sector still remains one of the largest and most lucrative in the world, with the oil and gas industry dominating the market.
In 2018, global energy investment began to stabilize from previous volatility and clocked in at US$1.8 trillion following three consecutive years of decline. Demand for natural gas, which is often considered a cleaner fossil fuel, has steadily increased over the last two years.
Analysts believe the growing appetite for oil and gas from developing regions of Africa and India will drive the sector well into the next decade. There is also significant growth potential in the industry as more industrialized countries like Canada and the UK continue to shift away from coal.
As more renewable options become available there has been a slight drop in oil and gas investment, despite an increase in project spending.
“A 4 percent rise in upstream oil and gas spending was underpinned by a higher oil price, and a shift to shorter cycle projects and shale,” states an International Energy Agency (IEA) report. “Spending plans for 2019 point to a potential new wave of conventional projects; for the moment, project approvals are below the level needed to match robust demand.”
The report notes the industry is shifting towards projects with shorter lead times as a way to mitigate risk.
In terms of total energy investment, the US leads the race spending more than US$150 billion on fossil fuel supply. China comes in second with total expenditures topping US$100 billion, followed by the Middle East, Russia, Europe, South East Asia and India.
“More than two dollars in every ten invested in energy goes to powering Asian economies; another two dollars divides between oil and gas and power in North America,” reports the IEA.
With vast potential for growth in emerging markets, as well as established ones some believe now may be the perfect time to get involved in the oil and natural gas market. With that in mind, the Investing News Network has put together a brief guide to investment opportunities in the dynamic oil and natural gas sector.
Oil and gas investing: Oil sector
The oil sector which has been a global powerhouse for decades has undergone some rapid changes in recent years.
In 2018, the US overtook Saudi Arabia — the defacto head of OPEC — for the first time in two decades to become the world’s leading producer of crude oil outputting 17,886,000 barrels per day (bpd). Global demand has also grown with conservative estimates pegging worldwide consumption at 93 million barrels per day (mbpd).
While some may worry about the future of the sector as electric vehicles become more ubiquitous, market watchers should keep in mind that crude is used to produce petroleum which has a number of high use applications including production of diesel fuel and heating oil, jet fuel, petrochemical feedstocks, waxes, lubricating oils and asphalt.
Because the oil sector is so lucrative and a driving force to so many economies there are a variety of ways those interested in the space can get involved, including futures, options, exchange-traded funds (ETFs) and stocks.
Oil and gas investing: Oil futures, options and ETFs
As mentioned, futures, options and ETFs are three ways for investors to gain exposure to the oil sector. Understanding the risk and reward potential associated with the investment options is paramount when selecting which method is appropriate.
Futures are derivative financial contracts that require the parties to exchange an asset at a predetermined future date and price. This direct investment tool is highly volatile, prone to extreme risk and requires a large initial investment.
Trading futures requires due diligence, and can be difficult for the average investor to grapple with. However, for those so inclined there is potential for return on investment.
Here are a few futures contracts offered on the New York Mercantile Exchange (NYMEX): Light Sweet Crude Oil, Brent Crude, E-mini Crude Oil, the Crude Oil Volatility Index (INDEXCBOE:OVX) and RBOB Gasoline.
Options offer a bit more stability than futures because the holder can choose whether they sell or not.
According to Investopedia, crude oil options are the most widely traded energy derivative on the NYMEX, one of the largest derivative product markets in the world. Although, the underlying asset for these options is actually not crude oil itself, futures contracts. Ultimately making oil options, options on futures.
For investors looking to mitigate risk and reduce the amount of capital needed for investment ETFs are a viable option.
ETFs are essentially a basket of various securities or stocks allowing investors to spread their capital over a variety of companies reducing the effect of market volatility on the value of the ETF.
ETFs are ideal for novice investors, due to the ability to get wide spread exposure to a diversified portfolio while only having a single stock and ticker symbol to follow.
In addition to the iShares Global Energy Sector ETF, some other oil ETFs include the United States Oil Fund (ARCA:USO), the United States Brent Oil Fund (ARCA:BNO), the Energy Select Sector SPDR (ARCA:XLE), the United States 12 Month Oil Fund (ARCA:USL), the PowerShares DB Oil Fund (ARCA:DBO), the United States Gasoline Fund (ARCA:UGA) and the SPDR S&P Oil & Gas Explore & Product (ARCA:XOP).
Oil and gas investing: Oil stocks
Then there are traditional stocks, allowing for direct investment in oil exploration, development and production companies. Some of the most lucrative stocks exchanged around the world are major oil companies.
CommodityHQ recommends selecting oil stocks that offer strong dividend options and have high liquidity, such as ExxonMobil (NYSE:XOM), BP (NYSE:BP,LSE:BP), ConocoPhillips (NYSE:COP), Transocean (NYSE:RIG) and Anadarko Petroleum (NYSE:APC).
While, Keith Schaefer, editor and publisher of the Oil and Gas Investments Bulletin, has highlighted some smaller oil companies that he believes investors should keep an eye on. Those energy stocks are Cardinal Energy (TSX:CJ) and Select Sands (TSXV:SNS).
Darrell Bishop, head of energy research of Haywood Securities, has also discussed his favorite energy stock picks. Bishop, who is positive about Canada’s potential, suggested investors watch out for Blackbird Energy, which merged with Pipestone Energy (TSXV:PIPE) in early 2019, and Parex Resources (TSX:PXT).
Of course, like with futures, options and ETFs there is some risk associated with investing directly in publicly traded companies.
Understanding whether the company has entered production or is still drilling and exploring is crucial. The type of project is also important, traditional production is extremely different from hydraulic fracturing.
Partnerships are also commonplace in the sector, so investors should know whether a company owns the project exclusively or is part of a join venture.
Oil and gas investing: Gas ETFs, futures and stocks
Despite being a synonym and often used interchangeable when referring to oil, gas is its own commodity. However, many companies that produce oil often also produce gas.
Many of the same options available to oil investors are also present in the gas sector.
As stated above, some ETFs offer exposure to both the oil and gas markets simultaneously. But, there are a few gas exclusive ETFs. According to CommodityHQ, the most popular natural gas ETFs include the United States Natural Gas Fund (ARCA:UNG) and the First Trust ISE Revere Natural Gas ETF (ARCA:FCG).
Those thinking about in natural gas futures must keep in mind that these contracts are very liquid, and extremely active throughout the week. Thursdays are usually the day when the heaviest trading of natural gas futures happens, following the release of US Department of Energy’s weekly natural gas storage report.
A few of the leading natural gas futures contracts include NG Henry Hub Natural Gas Futures, QG E-mini Natural Gas Futures and Delivered Natural Gas Futures.
Of course directly investing in gas companies involved in the natural gas market is also an option. However, it should be noted that it is difficult to find companies that are exclusively natural gas producers.
When looking for a potential investment opportunities in the stock market a company’s net worth, market cap, historical stock prices, income and cash flow should all be factored in. A financial adviser can also offer insight into which companies or jurisdictions that may offer a tax incentives may be available to potential investors in the oil and natural gas market.
Whether you choose to invest in publicly traded oil and gas company stocks, ETFs, futures or options the energy sector is worth exploring as it is poised to continue to grow in tandem with increasing demand.