Four Ways to Play Shrinking Oil Storage

Some highly leveraged oil exploration and production companies are scrambling to stay afloat right now.

Others have put themselves on the market, hoping to merge with larger, better-capitalized rivals.

There are, however, a few players in oil making money hand over fist. They’re doing it by dominating an obscure corner of the energy market…

I’m talking about oil storage.

On Our Way to Maximum Capacity?

Every other day, it seems there’s a new article proclaiming U.S. crude oil storage tanks are nearing maximum capacity. They further warn that if production continues to grow, we’ll be out of room before year’s end.

But is the storage sky really falling? Not according to the Energy Information Administration (EIA).

Here’s what it said in the March 11 installment of This Week in Petroleum: “Despite the recent increase in U.S. crude inventories, days of supply are still significantly below the peaks reached in the early 1980s…

“Furthermore, there is still an estimated 200 million barrels of storage capacityavailable in the United States.”

Check out the graph below. It illustrates future oil storage levels as projected by the EIA.

us commercial crude pil storage chart

According to its estimates, we’ll top out in May at 482.8 million barrels. This is close but still below the 521 million barrel capacity reported by the EIA in March.

Still, U.S. production is running at a clip of about 9.4 million bpd. And until refineries can use it, all that oil must be stored somewhere.

That’s where we come in…

The Business of Storing Oil 

In the words of Jean François Lambert, global head of commodity finance at HSBC Holdings: “Storage is king. Good tanking at the right location could make money.”

Actually, it could make a lot of money. Especially if the U.S. oil glut continues to grow. And it certainly will once prices retake their old levels of $90-100 per barrel.

You heard about The Guggenheim Shipping ETF (NYSE: SEA) on Tuesday from my Oxford Resource Explorer co-author Sean Brodrick. But I want to share some more direct storage plays.

Most are far from household names…

Koninklijke Vopak NV (OTC: VOPKF) is a Dutch-based storage terminal company. It owns 80 storage terminals in 28 countries. Back in February, it sold three terminals to Kinder Morgan Inc. (NYSE: KMI) in a deal worth $158 million. That increased Kinder Morgan’s storage capacity by over 2.2 million barrels.

Kinder Morgan is the largest independent storage and terminal operator in the U.S. With more than 180 terminals, it has approximately 125 million barrels of liquid storage. That’s about 20% of the total U.S. capacity.

Oiltanking Partners L.P. (NYSE: OILT) is another oil storage company. This one is a master limited partnership (MLP).

Longtime readers know I often recommend MLPs. The nice thing about these stocks is unit holders receive a nice tax-advantaged distribution. In the case of Oiltanking Partners, it’s 2.55%.

Magellan Midstream Partners L.P. (NYSE: MMP) is another MLP primarily engaged in transportation, storage and distribution. Magellan can store over 95 million barrels of crude oil, gasoline and diesel fuel.

It owns the longest refined petroleum products pipeline system in the U.S. More than 9,500 miles long, it has direct access to 50% of U.S. refining capacity. In addition, Magellan owns 1,600 miles of crude oil pipelines and storage facilities.

Finally, the company has about 26 million barrels of storage at marine terminals located along coastal waterways. Magellan currently sports a distribution yield of 3.47%.

Regardless of whether production in the U.S. has peaked (or is about to), storing U.S. oil production is big business.

The less storage capacity remaining, the higher storage rates for customers.

That means higher returns for any investor savvy enough to have a storage company or two in their energy portfolio.

Good investing,

Dave

Have thoughts on this article? Leave a comment below.

P.S. Now that America is officially an oil superpower, the rest of the oil-producing world is not happy. Saudi Arabia… Iran… China… Venezuela… Russia… We’re cutting a huge chunk out of their profit margins. And you better believe they’re planning to do something about it. New research has uncovered plans for an “oil weapon” that could do major damage to the U.S. economy, stocks and – most importantly – our currency. Click here to learn more.

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