How To Play The Oil Conspiracy Theories

Despite the world’s economic growth woes this year and consequent decreased energy demand in the U.S., the price of oil has held up pretty well this year ($77 as of November 3) when you’d actually think that it would be lower.

What gives?

Fundamentalists will point to two factors…

• Continued strong demand for oil from emerging markets.
• Decreasing oil output from non-OPEC producing nations such as Russia and Mexico.

Conspiracy theorists on the other hand, scoff at that notion. They blame it on the huge quantities that greedy oil companies hold offshore for no better reason than to increase their profits.

While I largely consider myself a fundamentalist, I decided to check it out, just in case there were any facts to support the complaints. And it first means asking a simple question…

Why would anyone want to store oil in tankers instead of selling it? After all, it costs money to charter those ships.

Oil’s Favorite Dance: The Contango

The only time it makes sense is in the case of a contango - a situation where you have a large difference between the current price of oil and what it costs one year from now. In this case, oil owners could hold onto it and sell it at a higher, more profitable price later.

In January 2009, we saw an example of a significant oil market contango, with the commodity at an incredible $23.70 a barrel! That goes a long way to explain why just three months later, a total of 56 supertankers held 100-120 million barrels in floating storage.

Conspiracy theorists will be quick to say, “I told you so” about that information, but a closer examination of the situation proves quite the opposite…

Four Ways to Profit From Oil’s Rise

Paul Tossetti, the Dallas-based director of oil markets at PFC Energy, estimates that it costs 50-60 cents each month ($6-$7.20 per year) to store each barrel of oil on a supertanker. While that adds up quickly, as long as the contango stays above $7 per barrel, it makes economic sense to let the oil sit tight.

That’s all changing though…

During the summer, the oil market contango fell to just $4 and $6 per barrel, as U.S. demand began rising, effectively eliminating any incentive to store oil in supertankers.

By the end of August, only 29 supertankers stored only 50-60 million barrels of oil away from the market. And according to Frontline, the world’s largest operator of supertankers, that number has dwindled further since then.

Mark Jenkins, a shipping analyst at SSY in London, said that floating storage deals would continue to decline back towards the historical level of five to seven tankers next year: “We do not anticipate a significant amount of floating storage as we move into 2010.”

Don’t expect that to placate the conspiracy theorists though. All that oil sitting on the sidelines actually held prices back, since traders feared the consequences of large amounts of oil hitting the market at the same time.

And with that fear gone, greed will likely take over, taking oil higher with it. And if you get in early, you can ride that sentiment for all its worth on ETFs and ETNs like:

• iPath S&P GSCI Crude Oil Total Return (OIL)
• PowerShares DB Oil Fund (DBO)
• ProShares Ultra DJ-UBS Crude Oil (UCO)
• United States Oil Fund LP (USO)

Investing in these broad-based funds can give your portfolio quick and easy exposure to the oil market without searching for individual investments, or spending a fortune doing it.

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