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Investing in America's too much oil "problem"

Susannah Lee

Crude oil prices held higher, despite giving back some gains after jumping on the latest weekly inventory report. U.S. crude stocks fell by 6.8 million barrels last week.  That’s much more than the decrease of 1.7 million barrels analysts were expecting.

The U.S. Energy Information Administration said crude stocks at the Cushing, Oklahoma storage facility fell by 1.024 million barrels. Even with the latest figures showing U.S. production is leveling off, America has still a pretty good ‘problem’ – too much oil. But still, record inventory levels have increased demand for where to store it.

Working storage capacity utilization of crude oil stocks as of March 31

“There actually was concern Cushing would fill up,” said Jay Hatfield, chief investment officer at Infrastructure Capital. Cushing, Oklahoma is where the domestic oil storage facility is located. “But there’s been an increase in the amount of capacity of pipelines between Cushing and the storage area in the Gulf Coast, so if Cushing ever does fill up then there could be a little bit of temporary weakness in oil prices.”

The demand for storage assets has been driven by the crude oil futures curve, which has been in contango since November 2014. With oil’s future months trading at higher value than the front month, market participants are “incentivized to sell later at a higher price,” said Hatfield.

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Investors looking for opportunity from the demand in oil storage may be interested in “the more diversified MLPs that are in the liquid segment,” said Hatfield. Among the midstream master limited partnership ‘MLP’ sector, the investment manager likes Plains All American Pipeline (PAA), because it has “strong credit ratings, and generally [has] lower exposure to commodity prices than other types of MLPs.”

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