As I look back on the first quarter of 2012, one of the most glaring events was the rise in gas prices here in the U.S. Wholesale gasoline began the year at $2.66/gallon on the NYMEX, and closed last Friday at $3.33, a gain of 67 cents … a jaw-dropping 25 percent.
The reasons for the increased gas prices are varied. Generally speaking, though, they’ve risen because oil prices have risen. I know that might sound obvious. But I’m not talking about the oil prices we follow in the U.S., which is known as West Texas Intermediate (WTI).
Instead, I’m talking about what has replaced WTI as the global benchmark of oil: Brent crude.
Brent crude rose from $109/barrel (bbl) to over $125/bbl in the first quarter on reduced supply coming out of the Middle East and on concern regarding potential military conflict between Israel and Iran.
In addition to the general rise in oil prices, we have seen a widening of the difference, or spread, between WTI and Brent crude prices. That spread has increased from about $9 at the beginning of the year to over $19 as of Monday morning. And this has created a very unique opportunity for refining companies in the central U.S.
You see, those refiners have the ability to buy crude oil at the WTI price, then refine it and sell gasoline based on the Brent crude price … which is over $120/bbl.
These market dynamics have occurred because of global unrest in the Middle East — not because oil company executives are greedy. So when the media, or anyone else, tries to vilify them, don’t believe it. The truth is prices are just reacting to the market in which they exist.
Now the reason there is such a large spread between WTI crude and Brent crude is mainly because the WTI crude we produce here in the Baaken Shale and middle of the country is “trapped” since there are very few pipelines that can transport it to the Gulf of Mexico for export.
But That Will Be Changing …
The integral Seaway Pipeline, which carries crude oil from the Gulf of Mexico to Cushing, Oklahoma, is going to be reversed. It will then carry oil from Cushing, Oklahoma to the Gulf of Mexico to be exported. In addition, other pipeline companies have discussed switching the direction of their pipelines to help relive the glut of WTI crude oil sitting in the U.S.
One potential way you could profit from this trend is by purchasing shares in master limited partnerships (MLPs) that make money as crude oil is transferred through their pipelines. Additionally, oil tanker companies will benefit from this increased export as well.
Two ways to play that:
First, is the Alerian MLP ETF (AMLP), which owns shares in infrastructure-related MLPs.
And the second, to a lesser extent, is the Claymore/Delta Global Shipping ETF (SEA), which owns shares in a tanker companies.
As a savvy contrarian investor, you must constantly be searching for opportunities in unique events. Indeed, the very wide WTI/Brent spread is one of those events. And as that spread narrows, there will potentially be multiple opportunities to profit with MLPs and tanker companies, which could leave you smiling the next time you fill up.
— Money and Markets