With the constant fluctuations in the stock market, even experienced investors are having trouble determining the best places to invest. Crude oil is one potential place to invest, but is this really the best place to put your money? To understand whether crude oil is a good investment, you need to understand the science behind it. Let’s take a closer look at the science of crude oil and what it takes to turn it into a profitable investment.
The Science of Crude
If you’ve ever created a compost pile for organic waste, you’re familiar with how crude oil is made. Exposed to the heat and pressure within the earth’s crust, ancient organic materials combine to form petroleum. Crude oil is mined up from deep beneath the earth’s crust, and once it is brought to the surface it can be given a value. Not all crude is the same, though — trace minerals from the surrounding rock can leach into the oil, changing the value.
Interview With Joe Koster Of Boyles Asset Management [Part One]
This is this first part of an interview with Joe Koster of Boyles Asset Management, part of ValueWalk’s new, exclusive interview series. Throughout this series, we are publishing weekly interviews with up-and-coming value-oriented hedge fund managers. You can find links to the first two interviews below: Interview With Scott Miller Of Greenhaven Road Capital [Part Read More
Crude is quantified by the weight of the oil itself, as ranked on a gravity scale. Water is rated at 10 gravities, which classifies it as heavy. Oil between 10 and 20 gravities is also considered heavy. Between 20 and 25 gravities are medium, and anything above 25 gravities is light.
The EPA breaks these down further into four classes. Class A is lightly colored, very thin and fluid and is considered the highest quality crude oil. Class B is thicker and may feel waxy. Class C is heavier, and have a tar-like consistency, and Class D are not fluid at all unless heated.
Once it is harvested, crude oil is refined into gasoline, fuel oil, heating oil and the heavier weight products used for large ships.
Measurements and Benchmarks
Crude oil is usually measured in barrels produced per day. One barrel of oil is roughly equivalent to U.S. gallons.
When it comes to investing in oil, it’s important to look at the crude oil benchmarks. There are three primary benchmarks commonly used for classifying crude oil:
- Brent Blend — The benchmark used for oil harvested from the North Sea. This oil is in high demand because it is high quality and used for refining gasoline and diesel fuel.
- West Texas Intermediate — Oil harvested from Texas, which is transported to refineries in Oklahoma via pipeline. It is highly coveted for refinement into gasoline.
- Dubai Crude — This oil is lower quality than either of the two previously mentioned benchmarks, but it also represents the only investment opportunity for individuals in the Middle East.
This is just a small sampling of crude oil benchmarks — there are over 100 currently being used, one for each location where oil is harvested.
One of the biggest things to consider before investing in crude oil is the classifications assigned to the oil. These include:
- Sulfur Level — The lower the sulfur level, the higher the quality of the oil. Crude oil with low sulfur levels is considered sweet, while higher sulfur levels create sour oil. Sour oil can also be corrosive.
- Density — The higher the gravity of the oil, the lower the quality and thus, the lower the price.
Light, sweet oil is considered the highest quality and will net the greatest profit when sold.
Benchmarks for Investment
Now that you know what oil benchmarks for harvesting and processing, what are the benchmarks that you should be looking for when you invest? You have three options:
- Upstream investment — investing in companies that are hunting for new oil fields, and operating the companies that are drilling these new fields.
- Midstream investment — Investing in the companies that handle transportation of both crude and refined products.
- Downstream investment — Investing in refineries and the companies that market the final product to consumers.
You may find companies to invest in that are part of every single part of the process, from drilling to refining to marketing, but there are just as many companies that specialize in one part of the process.
Investing in crude oil can be a lucrative option. It’s recommended that before you begin investing in this industry, you talk to an experienced investor or stock broker to ensure you’re getting the most for your money and that you invest in legitimate crude oil companies.