Search form

How To Profit From An Anomaly In The Oil Sector

By Brian Weepie | February 25, 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.