Dear Fellow Trader:
This week, I’m going to pull back the curtain on my favorite sector to own and trade.
I have excelled in this sector over the last two decades, as it is quite easy to measure based on the flow of capital and how hedge funds operate. I’m talking about the Energy sector…
Specifically… I’m turning my attention to oil production.
As I’ve long said, oil is the center of the global economy. In fact, the global economy was built around oil… not the other way around. It powers our cars and trucks. It heats our homes thanks to heating oil (a byproduct of refining). It fuels global supply chains.
But too often, most investors ignore oil because they think it’s boring. It isn’t. It’s one of the most technologically efficient sectors in the world, operated by some of the smartest people on the planet: petroleum engineers.
Today, I’m going to explain the three critical parts of the global oil supply chain. Then, this week, I’ll outline my favorite company in each part of the supply chain.
But let’s get started: Let’s talk about the upstream, midstream and downstream components of the oil supply chain.
Get to Know the Upstream
The upstream sector of the oil supply chain is where production begins.
There are three critical parts of this part of the upstream: Exploration, drilling and extraction.
- Exploration: Before drilling starts, companies must find oil that can be extracted. This requires that companies engage in geological surveys, seismic studies and exploratory drilling. Companies use advanced technology and data analysis to find potential oil fields.
- Drilling and Production: After a company finds a field with oil, the drilling may commence. Companies drill both on land and offshore. Once a drill is completed, engineers extract the crude oil and bring it to the surface. During this period, engineers must maintain and optimize the well, ensuring that costs and production remain stable.
- Reservoir Management: Companies have to determine the best way to extract oil. So, they use oil recovery techniques, like injection of water or chemicals to maximize recovery rates.
There’s Always Money in the Midstream
The midstream part of the oil supply chain focuses on the transportation and storage of crude oil from production sites to refineries. This segment is crucial for ensuring a steady supply of oil in the world.
- Transportation: Companies transport crude oil through pipelines, railroads, tankers, and trucks. Pipelines are the most common and cost-effective method, while tankers are used for long-distance and offshore transport. The movement of this crude is a big money-making operation, which is why these companies tend to have very strong cash flows.
- Storage: At various points in the supply chain, companies must store crude in tanks or facilities. These storage facilities act as buffers to ensure a continuous supply of oil to refineries, especially during seasonal changes in demand.
- Refined Products: Midstream operations also include the separation of oil into its various components, such as gasoline, diesel, jet fuel and petrochemical feedstocks. These products are transported to downstream facilities for further processing.
Profits in the Downstream
The downstream segment of the oil supply chain centers around the refining of crude oil into various products and their distribution to consumers.
- Refining: Crude oil is subjected to a refining process where it’s transformed into valuable products like gasoline, diesel, lubricants and petrochemicals. Refineries use distillation, cracking and other processes to make these byproducts. This is a very important part of the supply chain that has been reduced by government policy over the last few decades.
- Distribution: Once the refined products are finished, companies transport the products through a network of pipelines, trucks and ships to distribution centers, wholesalers and retailers.
- Retail: At the retail level, consumers purchase refined petroleum products like gasoline at service stations. Convenience stores, auto repair shops and other businesses are part of this end-use segment.
In Summation
The global oil supply chain is one that requires a strong understanding for investors to make profits. Learning the lingo is just the first step of the process. This week, I’ll explain each portion of the supply chain in greater detail, and I’ll offer you my favorite stock to trade.
Chat soon,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
P.S. Roger’s NEW ProTrader Dashboard Is READY
At 1 p.m. ET TODAY, Oct. 31, Roger Scott is launching his brand-new ProTrader Dashboard…
It’s part indicator, part scanner… and the best part?
You’ll be able to look over his shoulder as he explains exactly how it works, because it lets us know the strongest and weakest stocks to trade on any given day…
Giving us a free pass to copy the moves big institutions are making — in real time!
Roger has been giving these trades out in his Telegram channel for the past several weeks, and they’ve been crushing it!
He’ll also give everyone in attendance a free option trade directly from the ProTrader Dashboard so you can see it in action!
Market Momentum is RED
Momentum is red, but we saw a sharp rebound today out of oversold, correction territory. Expect for the markets to rebound heading into the Fed meeting. But there are still a lot of possible speed bumps in the week ahead.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
