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Gas, Oil Contango: Cash Register

The energy storage business offers moneymaking opportunities. Companies like Atlas Pipeline and Energy Transfer Equity have room to run.

I've decided I want to go back into the energy business, but not as a trader. I want to be in the storage business.

It's a free ride, particularly for natural gas, and I want in on it. It's all about the contango, about the pricing of futures contracts for crude oil and natural gas over the next year and the way those prices continue to rise as you move further out on the curve of prices and further out into the future.

This may sound strange if you're just getting acquainted with the futures markets. If you're making a transition from stocks to commodity futures, the idea that markets price for deliveries every month can be confusing. Even more confusing is the idea that prices for the next 18 months and even the next several years are available to be bet on today.

But if you're in the storage business right now, you're not making any bets, you don't have to. You're just making money by buying prompt barrels or gas, storing it for future delivery and selling contracts six or 12 or 18 months down the road. It is a carry trade, in some ways similar to the interest rate carry trade that has been blamed for the continued lack of commercial bank loans for the last two quarters. If current rates are close to zero while 10-year rates approach 4%, why loan out the money when that free arbitrage is available?

In oil and natural gas, the opportunity is even better. The "endless bid," which is what I have named the unrelenting, long-only investment interest in oil and natural gas from indexers, hedge funds, ETFs and other commodity managers, continues to pour money into the futures markets. They refuse to sell and continue to skew the premium that delivery months further out on the curve of prices show.

For oil, we now see a 12-month contango that rarely goes below $8, more than 10%. For natural gas, the 12-month contango has maintained insane levels of over a dollar for months now, more than a 35% premium.

The physical crude oil market has adjusted to take advantage of this now "normal" dislocation. Floating tankers have been cannibalized for storage instead of transport, and the land-based storage farms are absolutely loaded to the brim.

Because natural gas is so much more difficult to store, the opportunity has been a bit more difficult to capture. And where the direct investment to storage has been available, the trade has been a big winner, and perhaps even now not overdone.

Pipeline companies that specialize in transport but that still have storage assets have rallied massively. Look at two of the larger transport MLPs,

Kinder Morgan Energy Partners

(KMP)

and one of my best stock picks for 2009,

Enbridge Energy Partners

(EEP)

, both up close to 25% since September.

Opportunity still exists in the sector, and I'm looking at some smaller storage companies that I think still have room to run, like

TheStreet Recommends

Atlas Pipeline

(APL)

and

Energy Transfer Equity

(ETE)

, a subsidiary of

Energy Transfer Partners

(ETP)

.

Each of these MLPs deliver fantastic distributions (I hesitate to use the word dividend, because the tax ramifications can be very different) and they will continue to prosper as long as the storage premium remains.

And I see no reason why it shouldn't. These are companies that deserve to be part of everyone's portfolio. They are practically no-risk bets on the continuing contango and "endless bid."

And for me? I'm looking for some cheap empty storage, like an emptied well or salt mine. Find one competitively priced and hit your local banker for some cheap credit and you're in the storage business -- a business that looks to be the easiest road to easy money right now in the energy world.

At the time of publication, Dicker was long EEP, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.