Here Are 2 Ways To Cash-In From The New Oil Price Spread

Todays top stocks to buyJust a few years ago, if you had asked me what the price was for a barrel of oil, you would’ve received a straightforward answer.

Not anymore.

You see a couple years ago, a noticeable spread began to emerge between the world’s two major benchmarks:  Brent Crude and West Texas Intermediate Crude.

The former reflects the price of oil extracted from the European North Sea while the latter reflects American oil out of Cushing, Oklahoma.

In the past they typically traded at similar prices, but towards the end of 2010, that gap began to widen dramatically.

The gap peaked at $27 in October of last year, when Brent traded at $114 while WTI traded at a discounted $87.

Why the sudden change?

To put it simply, America has enjoyed record oil production in the last few years.

Hydraulic fracturing has helped to unlock huge crude supplies in shale formations throughout the country.

Unfortunately, our current pipeline network was not designed to handle such a massive amount of new inventory and the rapid increase in supply has led to massive backlogs.

Cushing, Oklahoma has become a bottleneck instead of a hub – forcing WTI prices down.

The spread has become so large that WTI pricing – once the benchmark for oil worldwide – is being swept aside in favor of Brent crude pricing instead.

According to Gordon Kwan, the head of regional energy research for Mirae Assets Securities Ltd., “WTI has become a misleading price indicator for global economic growth and will become increasingly less relevant versus Brent oil.”

Even the Energy Department’s Energy Information Administration (EIA) has made the switch from WTI to Brent crude pricing, saying it is now a better reflection of global oil economics amidst growing Asian demand and Middle East supply threats.

But with that being said, not all is lost on Texas crude slipping down a notch.

The waning WTI actually presents investors with some rare opportunities to take advantage of.

In fact, I see a depressed WTI price resulting in three positive ways for investors to profit in 2013 and beyond.

Opportunity #1: US Railways

With oil production up and a pipeline network virtually maxed out, railway companies have been picking up the slack and making a mint in the process.

Railroads allow producers to take advantage of the current oil price spread by moving crude from inland oil fields to coastal refineries that pay higher prices linked to Brent crude.

As long as Brent prices continue to be at a premium to WTI, it is worth it for producers to bypass the logjam at Cushing and ship their products to refineries by train.

Crude shipments are now the fastest-growing product for several big U.S. and Canadian Class 1 railroads.

According to Association of American Railroads, crude shipments by rail has surged nearly 3000% in the past five years.

Where volume was around 11,000 barrels per day in 2007 – that number has now climbed to 340,000 barrels in 2012.

If you include rail shipments from Canada’s oil sands, that number exceeds 400,000 bpd – roughly equal to that of a new pipeline.

As a result, companies like Union Pacific and Canadian National Railway have been on an absolute tear this past year.

And Warren Buffett owned BNSF railway expects to haul close to 90 million barrels of oil this year.

This is especially true of coastal refineries that pay higher prices linked to Brent crude.

Then when you factor in the transporting of oil-field materials such as frac sand, clays, rock and pipe, you have all the makings of a stable and prosperous investment opportunity for the long-term.

Opportunity #2: US Refineries

Refineries themselves are also getting a profitable leg-up as the Brent-WTI gap continues.

As buyers of crude, refineries with access to WTI benefit greatly in their ability to purchase product at a discount compared to the rest of the world.

Not only are they getting oil cheaper than anybody else, they’re also getting better quality.

As a result, American refineries have seen big improvements in their operating margins.  And this has translated into explosive growth for several companies in 2012.

Big players such as Valero Energy and Marathon Petroleum saw their share prices shoot higher by double and triple digit gains, respectively.

But it’s the investors of smaller refiners who truly cashed in this year, as companies like Delek US Holdings and Western Refining both surged 143%.

Barring no outright closure of the Brent-WTI spread, this industry will enjoy further healthy upward movement well into next year.

The Bottom Line

As you know, the US is hitting all-time highs in oil production, and that trend is expected to continue.

But unless that oil is able to make it to market, the spread between WTI and Brent crude will remain.

So the question is how long will it last?

In the short term, there are no viable alternatives for crude oil to travel from the oil patch to refineries except through pipelines (which are at full capacity) and rail.

According to Goldman Sachs, the opening of existing pipelines to relieve the glut of oil at Cushing, Oklahoma, could possibly help narrow WTI’s discount to Brent to about $6 a barrel.

And in the coming decades we could see a number of major pipeline projects built.   Enbridge’s Northern Gateway aims to move oil from the oil sands to the Pacific coast while TransCanada Corp’s Keystone XL will link the oil sands to refineries in Texas.

But because both face stiff political and environmental opposition, they may never get built at all.

So in the meantime, investors should get in on what promises to be one of the most lucrative opportunities of the New Year.

Wishing all of you a prosperous 2013!

Todays top stocks to buy
John Holt
for Top Stock Millionaire

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