Investing Through The Oil Surplus

Brian Hicks

Updated March 19, 2015

Oil In The Streets

With producers like Exxon Mobil Corp. (NYSE: XOM) down 19% and Royal Dutch Shell (NYSE: RDS-B) down 28% in about nine months, oil investing has had better years.

With the current glut, all of that oil has to go somewhere. Amid cheap oil and plummeting profits, storage companies are getting used to their new role in the industry.

Companies like Magellan Midstream Partners L.P. (NYSE: MPP), Oiltanking Partners, L.P. (NYSE: OILT), and Kinder Morgan, Inc. (NYSE: KMI) are poised to profit off of oil producer problems.

In the last year, Magellan has gone up 13%, Oiltanking Partners 22%, and Kinder Morgan 33%. All that ahead of demand for onshore tanks really ramping up.

But before that happens, rent prices will go up as well because storage companies know how important they are to the industry in this trying time.

Hostile Environment

Driven by record production from shale fields, the United States’ oil levels are already at an 80-year high of 459 million barrels and it’s soon expected to run out of places to store it.

The situation is particularly dire around the area of Cushing, Oklahoma, a shale oil hotspot that calls itself “the pipeline crossroads of the world.”

Oil companies are filling tanks as early as possible to avoid rising rental prices and finding themselves without a place to store their oil later on. Magellan recently announced that its 12 million barrels of capacity in Cushing have already been reserved.

Tanks are projected to fill up as soon as late April, resulting in a storage race between oil companies in the area. This is on top of already robust demand.

Storage companies typically charge between $0.20 and $0.50 a barrel per month in return for storage rental but the price varies based on the length on the contract.

However, due to reduced supply and increased demand, even short-term lease rates in the most sought after locations are expected to go up to as much as $0.80 a barrel.

When the market last presented such hostile terrain from 2008 to 2009, storage companies were unwilling to escalate rates so quickly, being unfamiliar with the repercussions their actions would cause throughout the market.

However, now that storage capacity owners know how much power they wield over oil companies, they are eager to push their advantage as much as possible.

Upset The Established Order

This new approach might shift the oil investing paradigm for as long as the current market conditions remain in place: plenty of cheap oil.

For instance, Vopak (VPK. AS), the world’s largest independent oil storage company, which owns onshore storage capacity numbering 210 million barrels of crude oil and refined petroleum products alike, has seen its share prices go up from $32.44 to $51.87 in just over seven months, a 60% gain.

Take advantage of oil storage companies’ positions now. As long as the oil stays cheap and the surplus remains, capacity is going to stay full and storage companies will remain profitable.

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