To understand where the oil market is headed and how investors might hope to take advantage, one would do well to take a look at what Chevron (NYSE:CVX) said in its investor-day presentation earlier this month.
First off, it helps to understand how the energy sector works. In massively oversimplified terms, some energy companies find and produce oil for sale, and others provide equipment and services to those oil producers.
If the price of oil goes up significantly, the companies that find and produce oil are incentivized to increase investment in expanding production capacity. And that isn’t difficult for them to afford because the oil they are currently producing and selling is more and more profitable as the price of oil rises, which drives cash flows and facilitates expanding credit using in-ground reserves as collateral.