Best Practices for Refinery stocks can provide investors with some kind of insulation from oil price volatility, if they complement them with upstream oil stocks.
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With high tech direct access trading platforms helping people trade online, stock trading is no longer the black art it was once considered to be. And there are attractive features such as commission free trading too that can help you trade efficiently. Why do investors look to invest in the oil refinery industry? Generally, you’ll find people owning other oil stocks buying refinery stocks to complement their holdings. There is solid reasoning behind this concept. So here are some things you might want to educate yourself on to figure out why this strategy is sought after. Motley Fool analyst Matthew DiLallo breaks down the oil industry value chain to better understand the role of refineries in the grand scheme of things. The Integral Role of the Oil Refinery First, let’s get to the basics of what the oil industry is all about. What an oil refinery basically does is take the crude oil, which was extracted from natural underground reservoirs by upstream oil companies, and then refine it into usable petroleum products and other fuels to be used in automobiles, machinery, factories, and other consumer and industrial applications. Refineries buy the crude oil and process them to products such as gasoline, diesel, lubricants, aviation fuel, asphalt, wax, kerosene and naphtha. DiLallo points out that gasoline is probably the most important product since refinery processing enables 19 gallons of gasoline to be produced from a 42-gallon barrel of crude oil. Refineries are therefore integral elements of any economy since their performance determines the success of the transportation segment and possibly other industries as well. On transportation depends the availability of consumer goods. Refineries themselves use oil for their functioning. Refineries Make the Finished Products that Benefit Consumers The first link in the value chain of the oil industry is the upstream segment where you have companies that drill wells into natural underground reservoirs to extract oil and natural gas as well as natural gas liquids (NGLs) to produce hydrocarbons. The midstream segment is involved in transporting and storing these hydrocarbons to process them. It is then that the refineries come in. They belong to the downstream segment that refines these hydrocarbons to usable consumer and industrial products.
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Now that you’ve figured out the role of refineries in the oil production segment, here’s an understanding of how oil prices affect them. You may think that a fall in oil prices, while affecting the entire oil industry, would also be detrimental to a refinery. But, as we mentioned earlier, refineries use oil for their functioning. So a fall in oil prices actually benefits refiners while being detrimental to the companies in the other oil and gas segments that we mentioned above. Why a Refinery Stock Is Great to Hold Along with Other Stocks Taking that into account, if you own a stock in the upstream oil and gas segment, owning a refinery stock compliments it. So while a fall in oil prices might negatively affect the stock you hold in the upstream segment, you also gain from the benefit it provides the refinery stock you hold. Investing this way in the oil segment can insulate you from the volatility in oil prices. One balances the other. That makes refinery stocks worth acquiring.
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