Intelligent Investing #71 Glenn Leest, The Basics of Commodities Part 1

Commodities – Oil and Natural Gas

1)    This episode is all about commodities, why did you choose to cover this topic? And what are you hoping the listeners get out of it?

·         Commodities should have a part in every investor’s portfolio, so it is important to understand what they are, how they work, and the differences between them.

2)    So, what are commodities and what are some that people are familiar with?

• Oil
• Natural Gas
• Gold
• Silver
• Lithium
• Wheat
• Sugar
• Soy
• Timber
• Steel

·         Commodities are raw materials or primary agricultural products that can be bought and sold in the marketplace. There are many types of commodities, Such as Oil, Natural Gas, Gold, Silver, Lithium and Wheat.

·         Commodities are generally interchangeable with other similar goods and are traded in large quantities, often on futures exchanges, where buyers and sellers agree on a price for delivery of the commodity at a future date. They are an important component of international trade and can be used as a hedge against inflation and other economic risks.

3)    Lets start off with oil then, what are some of the basics, how it is used and what influences its price?

Oil- The Basics

• Oil, also known as petroleum or crude oil, is a fossil fuel that is formed from the remains of ancient plants and animals.
• Oil is an important energy source and is used to power cars, airplanes, ships, and other forms of transportation. It is also used in the production of many products such as plastics, fertilizers, and chemicals.
• Oil is traded on commodity markets and its price is influenced by a range of factors such as global supply and demand, geopolitical events, and economic conditions.

4)    Why is oil so important?

• Energy: Oil is a primary source of energy for the world, powering transportation, electricity generation, heating, and many other processes. Without oil, many modern societies would struggle to function.
   
  • Driving your vehicle
•  
  • Combustion engines – Farm Equipment, industrial machines, Trains, 
• 
  
  • Consumer goods – Plastics
     
    • 7% of global petroleum use is for plastics.
  •  
• 
  

§  Economic Growth: The oil indus

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Transcript

 The following is paid programming brought to you by WT Wealth Management. Nothing we discuss should be considered as investment advice. This conversation is for informational purposes only. Please do your own research and speak to an investment advisor or financial planner before making any investment decisions.

Welcome to Intelligent Investing with Glenn Le. I'm your host, Jeff Orbitz, and Glenn is here as well. And if you'd like to talk with him, of course you're here, Glenn. It's, it's your show. You have got to be here. Yeah. But if you want to talk with Glenn one-on-one, give him a call. 9 2 8 2 2 5 24 74. We're going to do another multi-part series here.

Glenn wanted to get into commodities. Yeah. Um, so this is all about commodities the next two weeks. Uh, I guess why'd you choose this? Uh, over, you go over a lot of topics. We're well into many podcasts here at this point, Glenn. Yeah. Um, commodities play a big role in our lives today. Um, whether it be, um, stuff that we use, stuff that we need to heat our house, stuff that's, uh, used to make.

The products that we consume. Um, and it should be a part of every one of our portfolios. And so, understanding each of these asset classes, these commodities and how they work, I think will provide a lot of just diversification in your portfolios. I think it's a, an area that we've always investigated as a firm, and so even more important for people listening to consider are these commodities.

A good fit for my portfolio. There's a whole bunch of commodities. Um, we could probably just spend a couple hours just listing all of them. Yeah. Uh, but you have some specifics that, and, and that people are familiar with that you want to get into. Yeah. Yeah. There's um, some common commodities that most people have heard of that usually most investors have to some degree.

So, we've got oil, natural gas, gold, silver. Lithium, wheat, sugar, soy, timber, and steel. Um, with probably the first maybe five of the most popular, the oil, natural gas, gold, silver, and maybe lithium are the ones people tend to gravitate the most. Okay. Um, I guess you want to start off with oil and start the top of the list here.

Work our way through it. I mean, everyone's familiar with oil as a commodity. Well, probably one of the more important ones. Yeah. In the world. Yeah. I would say probably the most important commodity, maybe behind wheat. Wheat is important because it's in so much of our food. But yeah, oil. Um, also known as petroleum oil or petroleum crude oil.

It's just a fossil fuel that we mine from the ground, from thousands and millions of years of, um, pressure. Um, and then it creates the um, oil. From the decomposing organic matter. So, um, but it's an important, uh, energy source. It fuels our, our cars, our planes, our ships, our trains. Um, it even is a part of our, um, making plastics and fertilizers and other chemicals.

So, oil is, uh, definitely a very par, very important part of our, our daily lives. Yeah, I don't think people realize, Glenn, how much some people do, but how much. Of the products you have in your daily life is, is petroleum based. I mean, I'm just looking around the studio here. Mm-hmm. And everything I touch, the computer screens, the mixing boards, the microphones, the cables, everything is, has petroleum in it.

Mm-hmm. And then you mentioned the fertilizer. So literally the food we're eating mm-hmm. Relies on that. And it's just, without it, I, I guess we'd be in a totally different world. Yeah, exactly. Even if we just look at the importance of energy, um, you know, the. Oil is used in a lot of different processes, so, um, whether it be power and transportation, electric, electricity generation, heating, and a lot of industrial applications too.

So, think about all these big factories. They must have some sort of energy source or fuel, and a lot of times it's going to be some form of oil. Yeah. And I mean, when you get to your vehicles, just, uh, when you talk about combustion, uh, internal combustion engines mm-hmm. Again, back to you, your food and your products that you buy.

I mean, it's not just the fertilizer, but it's, it's all the equipment to, uh, harvest it. Yeah. Kill the soil. Exactly. Yeah. So, a lot of, uh, industrial applications with farming, um, are trains, you know, the BNSF railroad and all the other trains. They usually use diesel or some sort of gas-powered turbine engine.

So, um, the days of coal along gone, but we're not at electric trains yet for our main, um, transportation. And then also, um, seven, 7% of our petroleum products or petroleum is used for plastics in, in America. So that's, um, a large amount of how much, uh, petroleum is used, um, on a daily basis just to create all the different products we have, all the packaging and everything.

And on, do you remember the time when there weren’t so many plastics in packaging? I, I kind of still can, but now it's like, Everything. Yeah. You know, I mean, I still remember when there were a lot of glass bottles and things, Glenn, and it's like everything has gone to plastic and so it takes a ton of petroleum-based products.

Oil, natural gas. Yeah. So, like, um, even just the pen that we have in, uh, our hands, the, the keyboard, um, the plastics in your car. Um, boats, uh, I have a whole list and there's like hundreds of them. Contact lenses. I mean, anything that's plastic is derivative of oil at some sort. Now, um, natural gas can also be used to make plastics as well, but, um, you know, a lot of the products that we have, um, you know, are derived from oil at some point.

Mm-hmm. Yeah. You have so many in here listed. Yeah. Um, some of them, I don't know if we use anymore movie, film, I guess lenses, contact lenses, drinking cups is my red solo cup. Is that Yeah, eyeglasses? Yeah. Um, battery cases. Yeah. You name it. Speakers. Toilet seats. I mean, my floor that we're sitting on here.

Yeah. All that. Um, laminate flooring now. Yeah. It's all plastic base. It's so, it's, it's amazing. Yeah. And then the next thing is like, what, what drives the price of oil? Right? Yeah. Because oil is used in a lot of our processes, not just in America, but. Around the entire world. And, um, there the main one is probably supply and demand, and then also open, um, are the two ones that kind of determine pricing.

So, um, I don't know if the listeners know what OPEC is. It's the, um, basically it's a cartel, um, a grouping of a bunch of different nations that have come together to decide what the output of their oil is going to be. And then they can, um, change their output, um, to fix or change the prices of things too. So, um, it's a little bit of a price fixing that goes on there.

And then, um, the supply and demand are also affected by OPEC as well. So, if OPEC says we're going to produce a whole lot less oil, um, so that way we can drive the price up, well then there's less supply out there in the world and there's more in demand for it. So, they can kind of manipulate the price a lot, and that's always been a challenge, um, as, as investors is what is the price of oil going to do?

And we'd have to really know what OPEC's going to do. And, uh, they're not exactly always transparent, um, for what they're going to do and, and how they're going to change the prices. So, in the best interest of our interests, the United States interests. Yeah, yeah, yeah, exactly. So, they're not looking at, um, you know, what's good for the world.

They're looking at what's good for their pocketbooks, um, because a lot of their economy is based off oil, um, exportation. Well, they'll, and they'll cut production, they'll do things to manipulate that price. I think you mentioned that Glenn. Yeah. They'll say, oh, we're going to cut it by a hundred million barrels a day, or whatever the case may be.

Yep. Because obviously it's, it's a lot easier in business to sell less of a product at a higher price. Mm-hmm. You know, so they, they do that oftentimes, and then we see the prices go up significantly. Exactly. Exactly. The other thing that can also impact the price of oil is, um, natural disasters or extreme weather.

So, say we have an oil refinery somewhere off the coast of Mexico and we have a huge storm. Um, it knocks that refinery offline. Well, then, then, and it's going to just back up the refinery process and take longer. Um, and so oil is going to be naturally a little bit more expensive until that comes back online.

And I have, I pulled up OPEC Glenn, just for reference here. The member countries? Yeah. Al Algeria, Angola, Congo Equatorial guy. Guiana, uh, Gaon. Uh, I think I say Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela. Mm-hmm. And I thought there was an OPEC plus as well. Now there's always a plus for everything.

And I thought that included Russia. I think so, yeah. So, there's like a, a bonus subsequent membership. Yeah, it's uh, like your standard membership and then your plus membership that on, is that when it is what I, I think this gets lost Glenn, in the world we live in where we hear about electrification all the time, and I think you've spent time talking about that from an investment point of view and mm-hmm.

You know, we're going to get rid of internal combustion cars and, uh, natural gas stoves, and we're going to just get rid of the, the fossil fuels. But I don't think people play this out for very long. As far as what would life look like if Oil you, you remember that show Life After People? Mm-hmm. On discovery or whatever channel that was.

What would life look like if oil just vanished tomorrow? Which some people would like. To happen. Yeah, I think we'd be living, like, I think if you just stop oil, like it just disappeared overnight, you'd probably have a hundred million people minimum just pass away instantly. Um, because they wouldn't be able to heat their homes, or they wouldn't be able to keep their medications Cool.

Or any number of reasons. So that would be, you know, catastrophic. Which is awful to think about. Um, you know, for the sake of the good, the planet is, you know, sacrificing that many people. Um, But the other impact it'll have is a lot of economics. So, um, just the stuff that we're naming off, we wouldn't be able to have that anymore.

And so, uh, America, they're, um, you know, we have a large part of our economy that. It's based on oil, so that would radically change. Um, a lot of the products that we use wouldn't be available, um, which I don't know what the substitute would be, um, for plastics. Um, you can't have paper everything.

I mean, even the paper straws, you're like, oh, okay. Yeah, they. Biodegrade, but they biodegrade in your drink while you're drinking it. So yeah, those are awful. Yeah, they're not perfect technology, so I think life without oil would be very drastically different. Um, certainly, um, transportation would look very different.

Um, if everything was only electric and you couldn't afford the electric car, um, I guess you're not driving. Um, oil is cheap, um, effective and it's efficient. So, um, having a combustion engine is, um, you know, pretty, neat thing to have. And so yeah, getting rid of that would change. Even our industry for, uh, agriculture.

So, food would get very expensive. Yeah. How do you ship stuff across the country when you have to stop every three 400 miles to charge the battery for X number of hours? Mm-hmm. Yeah. Um, I could imagine. Do you remember the old TV sets that used to sit on the floor? It was like furniture. Yep. Maybe we'll go back to wood framed.

TV sets, you know, they're all, there's like built with a big cat, but still all the, you even mentioned the straw, Glenn. Yeah. Uh, I, I questioned that biodegradable, um, environmentally friendly straw. How much oil components are in there, how much oil did it touch that still? Yeah, in delivery and, and manufacturing and all that.

And yeah, for the heating process and the production of it, it's probably oils still involved even though the product isn't oil itself. It still had oil involved in it. And so, even a lot of our electric EV technology still involves oil to get them to that place. Um, I mean, if you went back to coal, um, yeah, that could be a substitute, but coal is dirty, um, really kind of toxic and, um, even more of an environmental impact than, uh, gas ever is.

So, um, yeah, I just think it'd be a very weird scenario if we didn't have oil in our, our world today. Yeah. All right. Let's get into the other, um, another petroleum. You mentioned coal. Um, but let's get into, um, natural gas. Um, another fossil fuel when we come back. And if you want to talk with Glenn, give him a call on (928) 225-2474, and you can also email Intelligent investing anytime at WT Wealth Management, that's intelligent investing@wtwealthmanagement.com.

Hang tight, Beck in a minute,

You’re listening to Intelligent Investing with Glenn LEAs. Give Glenn a call right now at (928) 225-2474. That's night. 2 8 2 2 5 24 74. More intelligent investing with Glenn Leest when we come back.

Welcome back to Intelligent Investing with Glenn. Give Glenn a call anytime at (928) 225-2474, or email intelligent investing@wtwealthmanagement.com. Plus, check out, uh, many past episodes by looking up intelligent investing with Glenn LEAs on your favorite podcast provider. We're here in a two-part series on commodities.

So, we, we covered oil bits. Uh, let's get into natural gas, Glenn, and I guess, how's that commodity work? What is it? How do we use it? Give us kind of the nuts and bolts there, the 30,000-foot view. Yeah, so natural gas is very similar to oil and how it's, um, extracted, how it's formed over the years. Um, and so natural gas can be used in a lot of different applications such as heating.

Um, generating electricity, powering our vehicles, uh, production of chemicals, fertilizers, um, I mean, think about everything in your house that's used. Uh, natural gas. I mean, you've got your, uh, gas dryer, you've got your stove, you've got maybe a gas fireplace, your furnace, your water heater, um, the hot, uh, the, the heating system for your house as well.

Maybe you have a propane outside barbecue that you use to heat the, uh, your grill. So, so propane has a lot of uses and. The, the nice benefit of propane is that it's a lot more of a cleaner burning fuel, um, than maybe oil or coal is, so it's much more environmentally friendly. Um, it has a lot of similar applications to gas, but not all the same applications.

Yeah. And it's like you said, it's clean, it's trans, it's, it's easily trans transported. Um, especially rural communities when you're talking propane. Yeah. Uh, natural gas stoves and all that, but there's a push to get rid of that. There's a push to, uh, deify, especially when it comes to your appliances at home.

Uh, we saw that come out just a few weeks ago where they're saying, hey, got to get rid of it. because suddenly now it's dangerous to your health to have that in your home. Uh, that got shot down quick, but I think that they're still being pushed. Yeah. It's um, I mean, natural gas is a very efficient, uh, source of heating.

Yeah. I mean, think about how fast it can heat up your house or how fast it can, um, heat up your water. And so, um, the electric versions of those, if you ever have an electric stove versus a gas burning stove, It's night and day difference. You're like, that's why all the, the top chefs don't use electric stoves.

It's just not the same Chef Ramsey with his, uh, yeah. Yeah. And even in the actual oven component, um, you know, natural gas is very effective in that area. I mean, do they even make electric, um, the actual stove parts, not the stove top, but the actual stove. Yeah. You can, you, I've seen, I've had them before.

Yeah. But yeah, they're there. Takes a while to heat up and that's what gas heats up really. Yeah. Really fast, quick, and efficient. Yeah. Yeah. AB absolutely. Um, you mentioned heating water. Um, that's, if you've ever had an electric hot water heater versus a gas hot water heater, that gets pricey, you know, re quickly.

Yeah. And I've never actually had any kind of, uh, electric, uh, water heater. Yeah. So, I'm not familiar. I have, yeah. But my natural gas bill is fairly, um, Affordable every month. I mean, even with the increase in price of natural gas over the years, it's maybe 60, $70 a month in winter when we're running the furnace a lot.

Um, and then during the summer it's maybe 40, so pretty, pretty cost effective. So, um, yeah, natural gas, it's, um, it's non-renewable. Um, fossil fuel. So, it's not like there's a whole bunch more being made, but there's still so much available that, um, I do question why we'd want to get out of our natural gas and it's such an efficient and clean burning source of fuel.

Well, in the United States we have a tremendous reserve of natural gas. Um, do you have a lot of clients that are asking, hey, how do I invest in this? Is it even kind of on the radar, Glenn, as far as, hey, how do I take advantage of this? Or are they worried about it? Uh, kind of the political winds that seem to want to get rid of it.

Um, so when we get exposure to commodities and we get a broad exposure to a lot of different commodities, it's not just oil or gas. It's a, a mixture of oil, gas, wheat, steel, coffee, soy sugar, all the big ones. And so, um, naturally we get exposure to all those. Um, and so they, cause they all have an importance, um, in our, in our portfolios.

Um, natural gas prices have, if you look at them in the last maybe 30, 40 years, have done. Uh, I've gotten them termed tremendously, um, over that time. Um, think about how much per gallon it was, you know, 10, 15, 20 years ago for natural gas and how is it, what, four or five bucks a gallon? Mm-hmm. Um, so if you have a house that's being powered by only propane, you've got one of those propane tanks heating your house, um, you know how expensive it can be.

Um, to fill up. And whereas like maybe five years ago it wasn't. So, I mean, expensive is a relative term. I mean, it's still cost effective, but it's gotten pricier over the years for sure. There's a huge economic side to this economic growth, uh, the whole gas industry, people that may also want to be in investing in things and yeah.

You know, there's a lot of jobs it gets, and it generates if, if you're into that sort of thing and, you know, tax revenue. Yeah. Um, too, to run the governments. Y Yeah. So, um, The actual job component of it. Um, the, the economic output from mining and extracting oil and refining it, um, we need it regardless. And so might as well have that industry in our own backyard, especially if we have enough reserves.

I don't really see a reason not to have, um, oil extraction or natural gas. Uh, Refineries and extraction, um, projects. Um, yeah, you don't want it next to a city obviously, but, um, there's some places you can put it that, you know, really won't have a huge impact on the, the surrounding communities. Um, and in fact, um, I just have a start here.

It’s natural gas. Um, you know, when it's turning to liquid, um, is used at around 4% of all transportation in America. So, um, there is still quite a bit of, um, vehicles, um, and transportation that does use natural gas. So, I see some of those buses. I think sometimes some of the public transport I, I think uses that Na, natural gas, and all that.

Um, what impacts, um, Glenn, the prices? How does it. How's the, how's, how's the prices happen when it comes to natural gas? What, what, what's, what's the major impacts there? Sure. So, uh, supply and demand, again, with, same with oil, um, but also economic growth can impact the price of oil and natural gas. So, think about during the pandemic when no one was traveling, the factories were shutting down, everything was, you know, really slowed.

The price of oil and natural gas just tanked. And then, once everything kind of got kickstarted back up again and there was a huge amount of demand, the prices went up. So, if you're in a growing nation that is growing there, their economy, you're going to have a lot more of a demand for natural gas, um, just because that's, uh, needed in the industrial and manufacturing process.

So that's one, uh, thing that affects its supply and demand. Now, there's no. Um, we don't have the same price fixed with natural gas, quite the same as OPEC, so that is a good, uh, good thing. Um, but extreme weather can, um, impact it as well. So, if you have extraction that's going on and, uh, huge storm hits or a flood and your, uh, extraction, um, or refinery, um, plant must go offline, that's obviously going to, um, increase the price because there's just not as much supply out there in the world.

Yeah, you mentioned, um, hurricane Katrina. I remember that back in 2005. And obviously a lot of natural gas production and, and, uh, facilities in, in, in, in, in the, the Gulf area, that, that shut down things for a while and that impacts it for the short term at Leest. Yeah. And, and that, and has an impact for sure.

Um, the, the other thing that you mentioned that has an impact is also the geopolitical events. So, if we have an administration that's trying to, get rid of natural gas or demonize it or punish it through a bunch of taxes and regulations, you're going to see companies just not want to produce as much or not do bigger and new plants and extraction refineries, because there's just not an incentive to do so.

Yeah. In fact, before we started the show, you said that they haven't built a. large oil refinery since 1970 and or the seventies. Yeah, yeah, seventies. Somewhere in, in that range because, um, I mean, it's like, it's kind of puzzling. Why not? But, uh, especially in today's day and age, um, I wouldn't be super excited to start one of those just because of the government's current, um, position towards fossil fuels.

Um, you know, who knows? You may start the plant and then, um, two or three years into it, the regulations get crazy. OSHA red tape, environmental red tape just gets become, um, too burdensome. And you may just say, you know what? This isn't worth it. So, there's all those, um, factors that go into play as far as new, um, new operations and new projects going forward, which is unfortunately kind of the situation we're in.

Yeah. Next time you drive, I don't know. If you go through places like El Paso, you go through regions where they have these refineries in the Midwest. Mm-hmm. Just take a note when you're going by them, because they're usually right off the freeway somewhere for convenient access. They look ancient. It's just like, it's like, uh, some kind of archeological dig here.

Rusting away and yeah. Seventies and it's been a long time. Or something that maybe was on Mad Max. Yeah, yeah. Get your last gallon. Yeah, they dated for sure. Oh man. Um, yeah, so would we, it would be a, I think a good thing economically if we could, um, extract more or at Leest, um, do more of it domestically, um, and maybe tap into our reserves.

Cause we have quite a bit of reserves and both natural gas and oil. And, um, naturally as time goes on, these, um, these fossil fuels are naturally going to be used less and less as we. Um, find better ways and more efficient ways, but in the meantime, this is the kind of technology we have and it works pretty good.

Yeah, it works. It's been refined for mm-hmm. Use of another word over a hundred years. It has, it has. And the technology and environmental impact of natural gas extraction and oil. Uh, versus today versus maybe 40 years ago is drastically different. Yeah. Um, much less, um, pollution, much less impact on the environment, much more efficient with what they're able to get out of the product.

So, um, I think that moving forward, um, looking at commodities and specifically oil and natural gas is a very, um, prudent thing for investors to look at and say, is this a good asset class for me to be in? Now the flip side is, um, they can be very volatile. Um, they can move around a lot.

And especially with Nat, uh, with gas, um, if OPEC comes out and makes just a sweeping decision, um, you know, that could affect the price dramatically. And, and we as investment advisors are always trying to, you know, with OPEC at Leest we're. We're, we're reacting after the news has come out because we don't know what OPEC is going to do.

And, um, that is one of the challenges. But over the long haul, um, I mean, oil right now is at seven, $7 a barrel, um, for crude. And, um, in 2008 it hit a high of one 50, but in the last maybe five to 10 years, it's been hovering kind of in that high eighty to one 20 range. Okay, so I think we're below.

Where we've been historically. I mean, not as low as the pandemic, but still, um, I think we have some, um, upside potential there. Yeah. And I would just like to end on Glenn. Um, what would life be like without this and natural gas? You, you put mm-hmm. Put a note in here about, and especially for some of the people listening maybe in, in some of the warmer areas of Arizona.

Imagine, uh, no ac no ac without that natural gas, it would not be a happy Yeah, it would, it wouldn't have grown as much, quite honestly. Yeah. The Southwest. No natural gas in the ac and maybe your furnace is electric and it's not as efficient as your oven or stove or barbecue. I mean, no, chef Ramsey. Yeah.

All right. If you want to talk with Glenn, um, give him a call, 9 2 8 2 2 5 24 74. Email Intelligent investing@wtwealthmanagement.com next week. Let's get into gold, silver, and some other commodities as well. Yeah. Gold, silver, and lithium. And lithium. All right, everybody. Have a great rest of your day and we'll see you next week.

Take care.

The following has been paid programming brought to you by WT Wealth Management. Nothing we've discussed should be considered as investment advice. This conversation was for informational purposes only. Please do your own research. And speak to an investment advisor or financial planner before making any investment decisions.