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How to Profit From an Anomaly in the Oil Sector

By Brian Weepie, analyst, Stansberry Resource Report
Friday, February 20, 2015

There's an anomaly in the oil sector today... And it's creating a great opportunity for resource investors.
 
As regular readers know, oil prices are down more than 50% since their June peak. Oil-drilling stocks are down an average of 55% since oil prices peaked. And many producers are cutting production.
 
Despite this, as we showed you recently, oil production is still outpacing demand. And oil inventories (the amount of oil in storage) are soaring. In fact, crude oil inventories just reached their highest level ever. And that's where today's opportunity comes in.
 
Let me explain...
 
Take a look at the following chart of U.S. oil inventories...
 
 
The U.S. Energy Information Administration (EIA) says there were more than 425 million barrels of crude oil in stock as of February 13. (This excludes oil in the government's emergency Strategic Petroleum Reserve.) Since 1982, the EIA has reported more than 400 million barrels of oil inventory only four times... And all of them occurred this year.
 
It's rare to see this much inventory, especially in the winter. Inventories normally fall due to heating demand. But today, they're rising from "contango."
 
Contango is a word you've likely never heard of. But it's incredibly important in the commodity world.
 
You see, in the commodity sector, investors can buy commodities through futures contracts. These are agreements to buy a certain asset – like oil – at a certain price on a certain day.
 
Occasionally, these contracts will have a higher price than the spot price of oil. In short, investors expect the price of oil to be higher in the future.
 
For example, the price of crude oil is $50.48 per barrel right now. But the February 2016 futures contract that expires on February 24, 2016 is $59.87.
 
That means investors can buy crude oil at today's spot price of $50.48 per barrel and sell the February 2016 futures contract for oil in the market at $59.87 per barrel. When the contract matures, the owner will deliver the oil and collect more than $9 per barrel profit (minus storage costs).
 
That brings us to today's opportunity...
 
With the potential to make big profits from contango, more and more investors are buying futures contracts. And the oil these investors are buying has to be stored somewhere.
 
Fortunately, there are companies that focus on doing just that – storing oil.
 
The table below lists four companies that generate a large portion of their profits from oil storage.
 
Company
Market Cap*
Yield
NuStar Energy, L.P. (NS)
$4.9
7.0%
Holly Energy Partners L.P. (HEP)
$2.0
6.3%
VTTI Energy Partners L.P (VTTI)
$0.9
4.4%
World Point Terminals, L.P. (WPT)
$0.7
6.0%
Source: S&P Capital IQ, as of 2/18/15
*in billions

Unlike the great majority of oil stocks, these companies have weathered the fall in the crude oil price well... The market cap of each of these companies is the same or higher than it was when the oil price peaked in June of last year. (VTTI is higher since it went public in August.)
 
In short, these companies are benefiting from the increasing demand for oil storage. As long as oil prices stay low, they'll continue to benefit from storing the enormous new volumes of oil.
 
Even better for investors, each of these companies is a master limited partnership (MLP). That means they're all obligated to return nearly all of their income to investors in exchange for certain tax benefits. So they have high dividend yields.
 
We own World Point in the Stansberry Resource Report portfolio. World Point generates all of its sales from its storage and terminal assets. The stock is up 8% since we bought in September... with more gains to come. But all of these stocks should benefit in the months ahead.
 
The trend is up in oil inventories. And energy MLPs that hold the oil will be big beneficiaries. For investors with foresight, there's a lot of money to be made with these names.
 
Good investing,
 
Brian Weepie




Further Reading:

Find more of Brian's latest research right here:
 
One More Reason to Be Cautious...
Two indicators say the bull market is still going. But two others are flashing warning signs...
 
Why the Oil Price Can't Bottom... Yet
The oil sector is nearing its "blown out and left for dead" bottom – the point when contrarian investors can step in and buy cheap, safe assets. But it can't happen yet...

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Market Watch
Symbol Price
Change
52-Wk
S&P 500 2097.45 -0.1% +14.7%
Oil (USO) 19.10 -0.8% -48.2%
Gold (GLD) 115.94 -0.3% -8.2%
Silver (SLV) 15.70 -0.3% -23.9%
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Euro 1.14 +0.0% -17.0%
Volatility (^VIX) 15.29 -1.0% -1.4%
Gold Stocks (^HUI) 183.89 -2.4% -22.5%
10-Year Yield 2.11 +1.9% -22.7%

World ETFs
Symbol Price
Change
52-Wk
India (IFN) 29.20 +1.3% +58.6%
China (FXI) 43.06 -0.1% +23.0%
USA (SPY) 209.98 -0.1% +17.0%
Taiwan (EWT) 15.79 -0.6% +15.9%
S. Africa (EZA) 68.60 -0.2% +17.0%
Singapore (EWS) 12.89 -0.5% +5.3%
Japan (EWJ) 12.22 +0.7% +7.7%
Israel (ISL) 16.72 +0.4% +3.4%
Canada (EWC) 27.83 -0.8% -1.8%
Lat.America (ILF) 31.26 -0.9% -4.5%
S. Korea (EWY) 55.72 -0.5% -5.3%
Russia (TRF) 9.91 -1.3% -24.0%

Sector ETFs
Symbol Price
Change
52-Wk
Semis (PSI) 26.63 +0.7% +39.8%
Retail (PMR) 39.80 -0.7% +25.9%
Transportation (IYT) 163.08 +0.1% +28.4%
Real Estate (IYR) 79.22 -1.9% +21.8%
Health Care (IYH) 151.09 +0.2% +23.8%
Big Tech (QQQ) 107.69 +0.5% +22.0%
Biotech (PBE) 54.24 +1.0% +22.2%
Consumer Svcs (IYC) 142.91 0.0% +20.9%
Utilities (XLU) 45.68 -1.1% +17.7%
Defense (PPA) 36.97 +0.5% +16.9%
Financials (IYF) 89.44 -0.5% +15.1%
Industrials (IYJ) 109.90 +0.1% +12.9%
Software (PSJ) 41.94 +0.3% +12.7%
Insurance (IAK) 49.42 +0.3% +12.8%
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Alt. Energy (PBW) 5.39 -0.7% -18.5%