Is It Time To Invest In Crude Oil?

Includes: DBO, OIL, USO
by: Arie Goren

Crude oil is the most important and by far the most traded commodity. How important crude oil really is for traders is something that can be deduced from the popular commodity index S&P GSCI (NYSEARCA:GSC). This index is a world-production weighted index that is based on the average quantity of production of each commodity in the index, based on available data over the last five years. The total weight of crude oil in this index is 48.4%: WTI Crude Oil - 30% and Brent Crude - 18.4%.

In order to find out if now is the time to invest in oil, the fundamental parameters of this important resource, production, consumption and reserves need to be analyzed. BP (NYSE:BP), the giant British oil and gas company, published lately its Statistical Review of World Energy 2013. In this review, one can find all the statistical data for every important source of energy; data from this source has been used in this study.

World Oil Production

Total world oil production rose from 31.8 million barrels per day in 1965 to 86.1 barrels per day in 2012, Compound Annual Growth Rate - CAGR : 2.14%. This production data includes crude oil, shale oil, oil sands and NGLs, and excludes liquid fuels from other sources, such as biomass and coal derivatives.

World Oil Consumption

Total world oil consumption rose from 30.5 million barrels per day in 1965 to 88.0 barrels per day in 2012, Compound Annual Growth Rate - CAGR : 2.33%. This consumption data includes inland demand plus international aviation and marine bunkers and refinery fuel and loss. Consumption of fuel ethanol and biodiesel is also included.

We can see that in the long-term, world oil consumption is rising at a higher rate than world production while the difference is fulfilled with ethanol and biodiesel.

World Proven Oil Reserves

Total world proven oil reserves rose from 683 billion barrels in 1980 to 1,669 billion barrels in 2012, Compound Annual Growth Rate - CAGR : 2.83%. It means that new discoveries and new drilling technologies surpass the quantity of oil that has been pumped.

World Consumption divided by Countries

The major oil consuming countries, their oil consumption in 2012 and oil consumption Compound Annual Growth Rate between 1965 to 2012, are represented in the two charts below.

We see that although the consumption growth is very small in the U.S. and other developed countries, it is very strong in South Korea, China, India, Thailand, Malaysia and Indonesia.

Adjusted Price of WTI Crude Oil

The adjusted price for inflation of WTI Crude Oil from 1967 is shown In the chart below. We can see from the chart that the real price of oil was on some occasions in 1980, 2008 and 2011, much higher than its price is today.

Here are some important ETFs and ETNs for oil which is traded on NYSEArca:

United States Oil (NYSEARCA:USO), iPath S&P GSCI Crude Oil TR Index ETN (NYSEARCA:OIL) and PowerShares DB Oil (NYSE:DBO).

The table below presents the trailing total returns of holding these funds; year to date (June 18), one year, three years and five years. The returns for the three and five years are annualized.





The much spoken of fear that proven world oil reserves will be extinguished in a few years seems unlikely, since new discoveries and new drilling technologies surpass the quantity of oil that has been pumped.

World oil consumption is growing at a higher rate than world production. Consumption of developing countries like China, India and others, is growing at a very high rate, and that could cause shortages and a higher price of oil.

The real price of oil is not in its historical highest values today, and therefore, now might be an appropriate time to start a long term investment in oil.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.