Daily Gains Letter

How to Play the Rebound in Oil Pipeline Stocks

By for Daily Gains Letter |

Rebound in Oil Pipeline StocksThe idea of nearly one million U.S. federal employees (read: consumers) being furloughed and not getting paid has sent oil prices tumbling to a three-month low, hovering near $100.00 a barrel.

The reach of the U.S. government shutdown goes well beyond those furloughed; it also affects those who rely on government services. Permitting and leasing for oil and gas drilling is at a halt, with 81% of all employees in the Department of Interior (which encompasses the Bureau of Land Management) on furlough. (Source: Ackerman, A., “Which Government Workers Are Affected by Shutdown?,” Wall Street Journal web site, October 2, 2013.)

Investors are also fearful that even a temporary furlough will dampen an already tepid economic recovery and drive the demand for oil and gas lower. And they should be afraid, as fourth-quarter U.S. growth is projected to decline 0.2 percentage points for every week that the U.S. government shutdown continues.

But that’s only one in a number of factors that are putting pressure on oil prices. On Wednesday, U.S. commercial crude oil inventory numbers came in at 5.5 million barrels, well above the forecasted 2.4 million barrels.

On top of that, improving relations in the Middle East, the resumption of full oil production in Libya, an easing of Western sanctions on crude oil exports from Iran, and a relatively quiet U.S. hurricane season could weigh on oil prices even longer.

However, once the U.S. government shutdown is in the rearview mirror, oil prices should start to recover. But in the meantime, while oil prices are trending lower, the price of some pipeline stocks have been breaking out.

Light Crude Oil Chart

Chart courtesy of www.StockCharts.com

Over the last year and a half, pipeline stocks have been following oil prices. Between July and September, investors were indecisive and, as a result, oil and pipeline stocks traded sideways. All of that changed, though, in the middle of September.

On September 17, Magellan Midstream Partners L.P. (NYSE/MMP) and El Paso Pipeline Partners, L.P. (NYSE/EPB) touched three-month lows while oil was still spiking near a two-year high.

On September 18, the Federal Reserve said it would continue its $85.0-billion-per-month quantitative easing strategy. Since then, oil prices have slipped more than six percent, while the price of oil and gas pipeline stocks such as Midstream and El Paso reversed their downtrend, increasing more than 9.5% and 6.5%, respectively.

Investors interested in oil and gas pipeline stocks can start researching any number of energy infrastructure companies, including Atlas Energy, L.P. (NYSE/ATLS), Energy Transfer Equity, L.P. (NYSE/ETE), and Targa Resources Partners LP (NYSE/NGLS).

Since the beginning of the year, oil producers and pipelines have been performing solidly, and thanks to the Federal Reserve, oil and gas pipeline companies have been on an upswing. While any threat to the U.S. economy, like a government shutdown, will send oil prices lower, energy companies will continue to produce oil—and they’ll use the North American pipeline infrastructure to get it wherever they need to.

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