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There's too much oil. Here's how to trade it

Eddie Seal | Bloomberg | Getty Images

"Halftime Report" trader Joe Terranova, currently in second place in CNBC's Halftime Report Model Portfolio competition, made a trade that will benefit from the oil supply glut in Cushing, Okahoma, the hub for WTI crude.

Even with oil falling another 1 percent Thursday to below $48 a barrel, Terranova bought shares of Valero Energy on the notion that the refiner will benefit as Cushing reaches its capacity limit.

"People are going to have to get rid of all that oil some time," said the trader.

Terranova, who built up an expertise in oil when he worked for Mark Fisher of MBF Clearing Corp. at the New York Mercantile Exchange, points out that the spread between WTI and Brent crude, the European benchmark, is telling us something. European oil is not falling as fast as WTI so the spread between the two has widened to $10 a barrel. Earlier this year, Brent was actually cheaper than the U.S. benchmark.

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What that's telling you, according to Terranova, is that the supply is so much greater in the U.S., especially in Cushing, so people are betting U.S. oil will continue to fall as Brent stabilizes.

The volume of that oil that needs to be refined into gasoline and heating oil will outweigh cheaper prices Valero will likely have to charge, according to the trader.

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For that reason, Terranova dumped EOG Resources,, an oil explorer whose value is more closely linked to the price of crude than Valero.

Terranova's portfolio is up 5 percent this year following a flurry of trades, including six in the last month. Jim Lebenthal leads the portfolio competition. For the Halftime Model Portfolio standings, click here.