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How to Profit When Oil Prices Slide

Oil prices continue to slide. On the first day of October West Texas Intermediate (WTI) dipped below $90 per barrel for the first time since spring 2013. Brent also declined, dropping below $93 per barrel, its lowest level in more than two years.

The sudden decline in oil prices, owing to a combination of greater supplies from U.S. shale, weak global demand, and a strengthening U.S. dollar, caught many by surprise. Investors have grown accustomed to the commodity boom, which saw rising prices for raw materials across the board over the last decade. Oil prices seemed to be on a relentless climb upwards, stopped only by the 2008 financial crisis. After recovering in 2009, they resumed their upward trajectory.

While the underlying supply and demand picture for oil still points to rising prices in the coming years, for now investors should keep in mind that the commodity boom may be coming to an end. Saudi Arabia cut its selling price for crude oil on October 1, an indication that it may be willing to live with lower oil prices for a while rather than pursue an aggressive cut back strategy to prop up prices.

All of this is to suggest that oil markets could remain soft for an extended period of time. How, then, to profit in the energy sector with a growing surplus of oil?

Refining

First, take a look at the refining sector. Refiners operate in a notoriously low-margin environment, but U.S. refiners have benefited from the surge in oil production…




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