Why Heating Oil Looks So Hot Right Now (DBC, UHN, USO, BPL, KMP)

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December 6, 2011 2:30pm NYSE:DBC NYSE:UHN

Tom Essaye: Whether they come from Washington or Europe, it seems like  news headlines (and rumors) are now influencing the stock market more than  anything else. And there is no better evidence of this than trading over the  past two weeks.

During the week of Thanksgiving, the market was sharply  lower because of the failed Super Committee and a continued lack of resolution  in Europe.

Then, just last week, the market recouped virtually all of  the previous week’s losses because of central bank coordination and new, upbeat  headlines out of Europe!

So what we’re left with is simply extreme — and apparently  random — ups and downs.

But please don’t let this action discourage you from  investing! If there’s one thing I learned while running my own hedge fund, it’s  that extreme volatility also creates extreme opportunity!

The key to investing now is to insulate your research from  the random noise and daily market movements, and to focus instead on finding undervalued  sectors and specific niche investments that are packed with potential.

For example …

Heating Oil Is One Niche Investment Area that I Like Right Now!

It should come as no surprise that as we enter winter, we  are also entering the strongest period for heating oil and distillate fuel demand.

Yet in addition to the typical seasonal demand, heating oil supplies, especially in the northeastern United States where heating oil is a major source of energy, are well below levels seen just two years ago.

So just based on  those two simple facts, we have a fundamentally attractive investment  opportunity … especially if we experience a colder-than-expected winter!

Regardless of next week’s headlines from Europe or Washington, those fundamentals will not change.

These positive supply/demand fundamentals have been  represented in the return of heating oil year to date. The heating oil ETF (NYSEARCA:UHN),  is up 14 percent this year compared to -1 percent for the S&P 500 and .006  percent for the broad based commodity ETF (NYSEARCA:DBC).

And that’s just on the surface. When I look a bit deeper  into the fundamentals of the heating oil and distillate market, I see some  additional opportunities …

Nationally and in the Northeast heating oil and distillate inventories are down 16.4 percent and 24 percent, respectively, from two years ago. Meanwhile, inventories are down in the Midwest and Gulf Coast regions, but  less so than in the Northeast.

Considering that homes in the Midwest and Gulf Coast regions are predominantly heated by natural gas, we could see more heating oil flowing  from these areas to the thirstier ones!

Who stands to profit from this trend?

Certain pipeline operators who will have the ability to  charge energy companies higher rates to move fuels from one place to another!

I know Nilus has discussed some of these companies in the  past — especially because they tend to produce tremendous income — but at the  very least this current heating oil story is just one more reason to  investigate some of these companies if you haven’t already done so.

Two that have strong pipelines in the northeast are Buckeye Partners L.P. (NYSE:BPL) and Kinder Morgan Energy Partners L.P. (NYSE:KMP).

And no matter what you decide to do, please remember that over  time, the unrelated headlines will fade away but the fundamentals will still be  in place. So those investors with the foresight to use short-term reactions as  a way to invest in sectors and companies with strong fundamentals will end up smiling  down the line.

Best wishes,

Written By Tom Essaye From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.

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