Does Pipeline Closure Signal Buying Opportunity? (USO, IXC, EWU, IPW, DKA, BP)

On Saturday, British Petroleum (NYSE:BP) shut down operations of its 800-mile Trans-Alaska Pipeline, after an underground leak was discovered at a pump station.

A pipeline leak there is nothing to sneeze at: The Trans-Alaska Pipeline transports over 630,000 barrels per day, or nearly 9 percent of the nation’s total crude oil output.

The closure also halted production for up to 95 percent of the North Slope region, which stretches from Prudhoe Bay up to Valdez and accounts for 415,000 barrels of crude oil per day. 

Naturally, news of the leak sent a shiver down the oil markets, which gained more than 2% in early Monday trading. Front-month oil futures funds, like the United States Oil Fund (NYSE:USO), also felt a boost, even after its choppy returns over the past month:

But despite the Trans-Alaska Pipeline’s importance to domestic production, all signs seem to suggest that we aren’t exactly facing the next Deepwater Horizon. In fact, about 90% of the leaked oil has already been recovered, and as of Monday morning, no injuries or environmental damage had been reported.

Still, BP – which owns a 47% stake in Trans-Alaska – has yet to confirm when they’ll reopen the pipeline. That, in turn, has put pressure both on short-term hedgers and refiners. Six hundred thousand barrels a day is not an unsubstantial sum, although its impact will be felt more by West Coast refineries than the East (which source much of their crude from the Gulf of Mexico).

BP’s stock was down on the news; the stock has fallen 23% over the past year. Likewise, several ETFs for which BP comprises a substantial fraction of assets also saw decreases:

As we covered back in June, BP makes up a sizable portion of the iShares S&P Global Energy Sector Index Fund (NYSE:IXC), the SPDR S&P International Energy Sector ETF (NYSE:IPW), and the non-energy iShares MSCI United Kingdom Fund (NYSE:EWU). (In our previous article, we also covered a fourth fund, the WisdomTree International Energy Fund (NYSE:DKA), but that ETF has since removed any exposure to BP.) BP makes up 5.40 percent of IXC, 10.5 percent of IPW, and 5.77 percent of EWU.

IXC is particularly exposed to this pipeline leak, as its portfolio also includes Exxon and ConocoPhillips, both of which also suffered closure-related production shutdowns. Together, both companies make up close to 18% of IXC’s allocation.

BP reps have said they’ll make the first attempts to reopen the pipeline network later this week. If the pipeline reopens that soon, then this leak’s lasting effects on the crude market – and BP stock prices — will likely be negligible.

In fact, this dip (if it proves temporary, that is) may even present a buying opportunity, both for BP and the ETFs that significantly include it in their portfolios. As oil prices continue to trend higher, they’ll inevitably push related securities’ values higher as well, leaving this temporary blip in the dust. 

Written By Lara Crigger From Hard Assets Investor (HAI) is a research-oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site will focus on hard assets investing without endorsing or recommending any particular investment product.

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