Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Potential Highs and Lows For Gold In 2020 - 5th Jun 20
Tying Gold Miners and USD Signals for What Comes Next - 5th Jun 20
Rigged Markets - Central Bank Hypnosis - 5th Jun 20
Gold’s role in the Greater Depression of 2020 - 5th Jun 20
UK Coronavirus Catastrophe Trend Analysis Video - 5th Jun 20
Why Land Rover Discovery Sport SAT NAV is Crap, Use Google Maps Instead - 5th Jun 20
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like TRADE.com are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

How to Exploit Crude Oil's Current Low Price

Commodities / Crude Oil Mar 04, 2015 - 12:41 PM GMT

By: Money_Morning

Commodities

Peter Krauth writes: If you've been eyeing a new gas-guzzling SUV as your next vehicle, you may want to reconsider that Prius once more. That's because today's low gas prices won't be around forever and oil prices aren't about to "tank" any time soon.

In fact, the oil price crash has created a state of "contango," a market anomaly that savvy investors can exploit. It's presenting a rare market opportunity to profit that only comes around once every few years.


A Market Anomaly That Leads to Big Profits

Let's start with a definition. Contango is trading jargon. It means the current price of a commodity is lower than prices for delivery in the future.

That's where we are in the oil market right now, and it's created a chance to profit.

The last time this happened was during the 2008-2009 "supercontango." Back then, oil tanker ships stored millions of barrels of crude oil off the coasts of major producing or strategic areas like the Gulf of Mexico, England, and Singapore. Spreads between near-month prices and those for delivery 12 months later ran better than $23 a barrel for West Texas Intermediate Crude (WTIC).

It led to a massive 100 million barrels just floating around in seaborne oil tankers for months on end. Big oil players bought the oil cheaply, and sold it on futures markets for much higher prices. Then, they simply stored it and waited for the delivery date to arrive, pocketing some hefty profits.

None of this was even possible until about 25 years ago. In 1990 entrepreneur Lars Jacobsson founded Scandinavian Tank Storage AB, introducing the concept of an oil storage trade.

Fast forward to today's opportunity which, while more modest, is still substantial.

Saudi price cuts, sustained North American shale production, and a worldwide slowdown are pressuring oil prices now.

But markets are forward looking. They know that drilling can't simply be "turned off" at a moment's notice. Doing that is a multi-step process requiring time, technical expertise, and money. So there's a lag between lower prices and lower output.

Right now markets are forecasting WTIC prices will be higher by $10 a barrel (conservative, in my view) a year from now. And a number of players are positioning to lock in those profits.

The most obvious benefactors are the large integrated oil companies like Exxon, Shell, and Total. They have the product and excess storage capacity to simply stockpile and sit on the oil, while selling it in the futures market for later delivery.

By digging into their deep pockets or accessing capital, large commodities traders like Trafigura and Vitol, and even Wall Street bigwigs like Goldman Sachs and Morgan Stanley, are cleaning up with big gains and little risk.

In the last eight months these heavy hitters have bought nearly 30 million barrels to store in supertankers.

Oil futures prices exhibit a distinctly upward sloping curve, confirming the opportunity remains solid. So long as the spread is sufficient to pay for insurance and storage plus an acceptable profit margin, the opportunity is in place.

How to Profit from Contango

Don't be dismayed, it's not just for the big boys.

For retail investors, there's also a way to profit from oil's current state of contango, and that's through the oil services subsector that benefits from oil storage.

World Point Terminals LP (NYSE: WPT) is a limited partnership which owns and operates terminals and storage facilities for light refined products, heavy refined products, and crude oil. It is focused on three key areas in the United States, specifically the East Coast, the Gulf Coast, and the Midwest. More specifically, the company stores gas distillates, jet fuel, fuel oils, liquid asphalt, and crude oil.

WPT boasts 12.8 million barrels of storage capacity over 14 terminals in strategic locations. This allows the company to offer integrated terminals and storage to oil refiners, distributors, marketers, and traders. Thanks to its locations, WPT's assets provide efficient access to transportation infrastructure near demand markets and exports hubs.

With a $670 million market cap, World Point is trading at a reasonable 18.9 current P/E and an attractive 17.2 forward P/E. Profit margins are thick at nearly 39% and return on equity is healthy at 21%. Its quarterly earnings have been growing at a robust clip of 28.3%. All of that has meant a generous yield of 6% from the quarterly dividend.

I wouldn't be surprised to see shares gain 40% to 50% over the next six months as the market comes to realize that production cuts will soon kick in and demand isn't about to fall off a cliff. In fact, I expect demand to get somewhat more robust as retail, commercial, and industrial consumers find ways to use more at these lower prices.

Consider too that some of the biggest demand in this market comes from the official sector. You can be sure that China's stocking up while oil's on sale to add to its currently growing strategic petroleum reserve. Now that you know and understand contango, you can take your own steps to benefit from this rare but lucrative oil price arbitrage opportunity.

Source :http://moneymorning.com/2015/02/24/this-massive-crunch-means-higher-oil-prices/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules