How to Interpret the Sector

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Why Energy Stocks

Energy stocks are Energy companies that are listed on the stock market. There are always plenty of opportunities to profit from investing in this sector. We are going to outline what factors influence this sector, what risks are involved and how to look for the types companies that offer the best return or lowest risk.

Simply put, a market sector is used to describe a part of the economy. It encompasses similar companies under one banner. For instance a hospital and an aged care home would be considered under the “Health Care” sector.

The Energy sector is a category of stocks that relate to producing or supplying energy. This could include oil gas and LNG. The Energy index is  under the ticker SPNY which is the measurement tool commonly used to track the performance of the Energy sector and thus the mining sector.

We believe there is currently a huge gap between professional and everyday investors. Where professional investors have access to insights and information that normal investors do not.  We’re here to bridge that gap by providing analysis that is accessible and easy to understand.

Sector Rank
In United States

See Full Ranking Here 

12 th
Current Rank
12
Total Sectors

Percentage Change Since last month

SPNY Index Decreased By 14.5%
-14.5%
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What is the difference between each energy type?

Crude oil- Refers to the WTI West Texas Intermediate and is the North American oil bench mark and primarily sourced from Texas. Crude oil is lighter due to a lower sulfur content then Brent oil. Crude Oil is priced cheaper then Brent oil due to the fact that its location is land based making transport more difficult. 

Brent oil- Refers to oil that is produced in the north sea these oil wells are mostly sea based. Brent oil is the international oil bench mark and makes up two thirds of all oil pricing. Brent oil is heavier due to a higher sulfur content then Crude oil. Brent oil is priced at a premium when compared to Crude oil due to the fact that its location is sea based making transport or storage easier.

Natural Gas-  Was actually formed millions of years ago when dead organisms and animals sunk to the bottom of the ocean and were berried under rock. Under intense pressure over millions of years these organisms transformed into gas. Natural gas is commonly found in underground reservoirs.  Natural gas in commonly uses for electricity  generation such as heating for domestic and industrial use. Natural gas can also be used for fuel for vehicles when its compressed or for fuel cells or fertilizers. When natural gas is burned their is fewer greenhouse gas emissions when compared to other fossil fuels.

LNG – (LNG) Stands for Liquefied Natural Gas that has been cooled to a liquid form for transportation ease and safety. LNG can be used as an alternative to transport fuel. Once LNG is heated it can be used for electricity  generation. 

Where does the world Oil supply come from?

Percentage of world Oil Production

1) OPEC
OPEC 44.83%
2) United States
USA 18.65%
3) Russia
Russia 13.4%
Other Countries
Other Countries 39.9%

Where does the world Oil Demand come from?

Percentage of world oil Demand

1) United States
USA 19.38%
2) China
China 14.04%
3) India
5.26%
Other Countries
Other Countries 61.33%

OPEC'S Influence on the Oil market

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OPEC- Stands for only petroleum exporting countries. These countries are listed in the map above and these are all the countries in OPEC. The organization was founded in September 1960, each meeting is currently held in Vienna Austria where these nations meet to discuss oil production among its members. 

When all the OPEC nations come together they can agree to increase or reduce production in an effort to increase or decrease oil prices. OPEC makes up for 75% of the total world oil reserves and 44.83% of the worlds oil production. This means that when they collectively agree to cut or increase production it can have a huge impact on the oil price.

What the Risks and Opportunities oil companies face?

Risks you should watch out for!

Decline in Oil Prices – Energy companies are always impacted by changes in the oil they produce, if prices of oil  declines in value then the companies profitability might decreases and so might the stock price. 

Increases in trade barriers–  If a country decided to place taffiffs or quotas on international exports then oil producers that are exporting would experience higher costs when they go to sell their oil overseas this would increase the companies costs and negatively impact the profitability of the oil company.

Exchange rate risk –  This is more true for oil exporting countries, when their domestic currency appreciates. When these oil producers are paid for their oil the international currency is converted into appropriate rate in the domestic currency. If the domestic currency is high then the producer receives less when the international currency is converted resulting in less profitability for the mining company.

Political Risk–  Even if you have perfect market conditions and the relevant drilling licenses there is always the possibility of political risk.  These risks are more common with countries that have a large degree of political instability in countries with less stable governments. Countries that are less politically stable have more volatile legal systems and could see changes in drilling leases. They are also more prone to corruption that could influence certain mining lease outcomes against the company that secured the drilling lease. Companies that are operating in more stable countries would always be preferable when selecting energy stocks.

Exploration Risks

This type of risk occurs in the exploration stage of the energy companies timeline. If you are unfamiliar with the basic timeline for energy companies see the timeline below. This type of risk occurs when the results of feasibility studies show that the oil deposits might be non existent or there is only a very small deposit. Although this has an impact on both Major and Junior producers  this risk is more of a threat to Junior oil producers  because they don’t have a larger amount of capital or an existing profitable deposit that can finance additional oil searches.

Risks you should watch out for!

Decline in Oil Prices – Energy companies are always impacted by changes in the oil they produce, if prices of oil  declines in value then the companies profitability might decreases and so might the stock price. 

Increases in trade barriers–  If a country decided to place taffiffs or quotas on international exports then oil producers that are exporting would experience higher costs when they go to sell their oil overseas this would increase the companies costs and negatively impact the profitability of the oil company.

Exchange rate risk –  This is more true for oil exporting countries, when their domestic currency appreciates. When these oil producers are paid for their oil the international currency is converted into appropriate rate in the domestic currency. If the domestic currency is high then the producer receives less when the international currency is converted resulting in less profitability for the mining company.

Political Risk–  Even if you have perfect market conditions and the relevant drilling licenses there is always the possibility of political risk.  These risks are more common with countries that have a large degree of political instability in countries with less stable governments. Countries that are less politically stable have more volatile legal systems and could see changes in drilling leases. They are also more prone to corruption that could influence certain mining lease outcomes against the company that secured the drilling lease. Companies that are operating in more stable countries would always be preferable when selecting energy stocks.

Exploration Risks

This type of risk occurs in the exploration stage of the energy companies timeline. If you are unfamiliar with the basic timeline for energy companies see the timeline below. This type of risk occurs when the results of feasibility studies show that the oil deposits might be non existent or there is only a very small deposit. Although this has an impact on both Major and Junior producers  this risk is more of a threat to Junior oil producers  because they don’t have a larger amount of capital or an existing profitable deposit that can finance additional oil searches.

Opportunities to look for!

Increase In Oil prices – Energy companies are always impacted by changes oil prices, if  the price of oil increases in value then the companies profitability might Increase and so might the stock price.

Successful Exploration Activities- This opportunity arises in the exploration stage of the oil companies timeline. If you are unfamiliar with the basic timeline for oil companies see the timeline below. This type of opportunity occurs when the results of feasibility studies show that the oil they are looking for is in fact there and the feasibility study highlights proof of a rich oil deposit. Although this has an impact on both Major and Junior oil producers this opportunity has a greater impact on the Junior oil producers stock price. This is due to the fact that the deposit may be worth more or even  50% of the total market capitalisation of the Junior oil producer and therefore would be reflected in the stock price.

Joint Venture or Merger- This opportunity is most common when a Junior oil producer has a successful feasibility study and a major oil producer forms a joint venture with the Junior and decides to help finance the production and development costs. This will help ease any concerns the market might have about the Junior oil producers ability to get the deposit into production. Mergers are also an opportunity if a merger does occur between two energy companies this will also cause a rise in the stocks price.

Favorable Exchange Rate-

This is more of an opportunity for mining exporting countries, when their domestic currency depreciates. When these oil producers are paid for their oil, international currency is converted into an appropriate rate in their  domestic currency. If the domestic currency is low then the producer receives more when the international currency is converted resulting in more profitability for the energy company.

Changing Demand and Supply Conditions –  An opportunity can present itself when there are changes in the demand and supply conditions. If there is an increase in the demand for oil then that may cause an increase in the price of oil. There would also be opportunities on the supply side when there is a shortage of supply for oil,  therefore if a energy producer was drilling for oil which is in a shortage then the oil they produce becomes more valuable. This would increase the price of that resource and thus the profitability of the producer.

The basic timeline for Oil companies

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Investing in Junior Oil Producers Vs Major Oil Producers

Junior Oil Producers

ABOUT – These are companies that usually have a small amount of capital and mainly in the prospecting and exploration stage of drilling. These oil companies are yet to begin any form of production on their oil deposit, instead focus on surveying and undertaking feasibility studies. Most of the company’s success is in this stage and is dependent on the results of their feasibility study a successful feasibility study can make or break a Junior oil producer.  

 

Level of Risk
HIgh
Profit Potential
High

Major Oil Producers

ABOUT – These are companies that usually have a large amount of capital and already have a well-established oil rig in operation and are in the production stage. These oil companies producing and shipping their oil, these companies focus on operations on their current oil rig logistics and other operational activities. They can be impacted by the changes in oil prices and exchange rates. It is common for a major oil producer to form a joint venture with a junior oil producer after a successful feasibility study or an outright buy out.

Level of Risk
Low
Profit Potential
Low

The Rise of Natural Gas

Alternatives to investing in specific oil stocks

Oil ETF’s are a great way to get some exposure to the rapidly growing mining sector. An ETF or exchange-traded fund is a fund that invests in a variety of mining companies. You can invest in an EFT and not have to worry about individually picking and selecting oil stocks.  Below is an example of a oil EFT if you’re not sure where to look.