How to profit from the glut of oil

by , 27 November 2015

In the middle of last year, the oil price started its decent. This year, the price of oil has struggled to get above $60 a barrel.

In the past when demand for oil ebbed, producers pulled back production to help the price out. But this time around, producers continue to pump oil out of the ground.

This leaves the industry with a bit of a problem. What to do with all the excess oil? But this problem gives savvy investors a way to profit…


Tankers are brimming with oil

 
At the moment there are more than 100 million barrels of crude oil bobbing about in ships at sea. Half of this is down to traders who are waiting for the price of oil to recover.
 
And this means there are opportunities for investors to profit, Sean Brodrick in Investment U explains.
 
Take the rental rates of super-tankers. A very large crude carrier can hold 2 million barrels of oil. The price to rent one of these hit $108,000 last month. The price has since pulled back, but a tanker like this still charge over $70,000 a day.
 

The mounting surplus of oil

 
Iraq is continuing to increase its rate of oil production and exports. This is at a faster rate than any other OPEC member. A chunk of this is making its way to the US.
 
Iran is also producing more than it has since 1962. The majority of this is also making its way to the US. This looks set to rise when sanctions are lifted next year.
 
And Saudi Arabia is still increasing production too.
 
The US also continues to produce oil. Storage levels are now close to 80 year highs there.
 
Based on the Energy Information Administration’s figures, there is 95.48 million barrels of oil produced each day in the world. At the moment, only 93.86 million barrels are being used. This means a surplus of 1.4 million barrels a day which has to be stored somewhere.
 

How to profit from the oil surplus

 
You could look to invest in the companies that deal with tankers, but the problem here is they are under pressure as demand for global shipping in other sectors is down.
 
One option to consider is refiners. When oil falls in price, the spread between what refiners pay for crude oil and their product (petrol and other oil products) widens. 
 
Instead of picking individual refiners, you could invest in the Market Vectors Oil Refiners ETF [NYSE:CRAK], but this is an ETF which sees low volume so tread carefully.
 
Another option is to consider oil tankers. Look for companies that specialise in this market.
 
So there you have it. How to profit from the glut of oil.
 
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