Oil Stocks That are Beating the Market

Well, ladies and gentlemen, we have a contango.

If you aren’t sure what that means, don’t worry. A contango is actually an easily understood occurrence in the commodities sector.

And after a six-month bear market for crude oil prices, it was bound to happen again.

See, when the current cash price for oil is lower than the projected price for a date in the future, the situation is called a contango. And as of last Wednesday, the oil market entered a contango phase.

This benefits investors in some ways, and it hurts them in others, which I’ll explain in a moment.

But first, let me say that this is the first time since 2009 — just as we were starting to climb back out of the lows of the recession — that we have seen a contango situation in the oil market.

Although it may be a little confusing, the chart above illustrates how similar the price situation for crude oil is between 2009 and today. As you can see, in the highlighted portion to the left, prices drift below zero as they also do at the far right of the chart — the portion representing today’s contango.

But does this mean oil prices have found a bottom?

History Repeats Itself

While I can’t predict an exact time when oil will start a consistent rebound, I can say that history is starting to repeat itself.

Now that we are in a contango, many companies have already started to take action, just as they did back in 2009.

For example, many large energy trading firms have started to lease offshore storage tankers for long-term contracts as a means to store as much crude as possible and sell it once the price returns to normal.

Vitol, the world’s largest such firm, has started acquiring leases on supertankers, including a 3 million-barrel behemoth from TI Oceania. Other companies like Trafigura and Royal Dutch Shell (NYSE: RDS) have followed a similar path and leased tankers to store oil offshore.

The practice is unusual — unless you look back to 2009, when tankers were leased for the exact same reason.

It’s not just companies doing it, either. China has begun leasing tankers for long-term storage in order to save some money on oil while prices are low. Despite China’s rampant buying, however, the demand there still hasn’t been enough to soak up the surplus oil that’s caused the rapid price decline.

And that’s the key when it comes to oil prices: supply versus demand. Even though spot prices and futures prices are telling us oil is going to move up, the supply-demand picture is not.

So for now, I am not ready to say a contango means we’ve found the bottom. However, I will say we’re probably close…

Tankers, Refiners, and Services

If I’m correct about history repeating itself, it’s time to start building positions. Just check out what happened last time we had a contango:

Although oil prices are low, a few industries within the energy sector are seeing (or are about to see) some major profit growth…

Like I said before, on news of new contracts, shares of tanker companies have already soared in the last few days. But let’s not forget that onshore storage facilities won’t have to worry about a lack of oil to store in their tanks, either.

And with prices so low and firms like Vitol trying to store all of the oil they can get their hands on, expect demand for all types of storage to skyrocket.

Another industry poised to do well is the refinery industry. Because crude oil prices are so low, refineries are able to buy more oil for less money and can turn that into a greater profit at the pump when it sells to customers like you and me.

These companies offer stable sources of income and are great value buys right now if you know where to look.

While I understand how difficult it is to buy stocks when prices are as low as they are — especially without the assurance that the price is actually going to go back up — it is imperative to do so now if you want to make money investing in energy.

If you’re like me and are risk averse, I suggest master limited partnerships.

MLPs offer high yields because they pay no corporate income tax and are much safer investments so long as you find ones that have decent track records and profitable business structures.

My colleagues Keith Kohl and Chris DeHaemer have developed a portfolio of MLPs that have the potential to offer safety and capital appreciation while oil prices are low.

See what they’ve done here, and keep your eye on futures prices.

Good Investing, 

Alex Martinelli

With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.