As oil prices teeter at $53 a barrel, Jim Cramer drilled down on how investors should play what looks like a temporary ceiling for crude due to a growing glut of U.S. oil.
"Why is our production screaming? Because at these levels, so many oil companies, particularly in the Permian Basin, can make about 100 percent profit, so they're going to keep producing oil like mad and then selling the oil futures aggressively, once again putting a lid on the commodity's price," the "Mad Money" host said.
The Permian Basin, stretching across western Texas and southeastern New Mexico, has been a hot spot for U.S. drillers, particularly since a group of OPEC and non-OPEC oil producers agreed to production cuts in November.
Now that the output cuts look like they may be extended, U.S. producers are not holding back, putting out 100,000 new barrels every month and saturating the market with supply.
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"We've been telling club members of [Cramer's charitable trust] ActionAlertsPLUS.com it is time to trim some of your oil exposure here, because nothing can counteract the relentless increases in product that we're seeing in this country," Cramer said.
And, despite crises in Venezuela, conflict in Libya, and building tensions with Russia and Syria, Cramer said nothing can throw a wrench in this new wave of output.
But as the oil wave grows, the amount of pipe required to bring it to market becomes insufficient.
"Which brings me to the best way to play the oil patch with crude at these elevated levels: the MLPs, the master limited partnerships, and the pipeline companies that transport our oil, particularly oil from the Permian in Texas to the rest of the Gulf," Cramer said.
The "Mad Money" host drew on Tuesday's news from pipeline operator NuStar Energy, which put up a secondary offering of its shares and bought a pipeline in the Permian Basin — a benefit to its shareholders, in Cramer's eyes.
"I am still concerned about its gigantic yield as a red flag — meaning the company might have trouble paying that dividend to shareholders — but the issuance of all this stock will help immensely when it comes to dealing with any potential shortfall," he said.
Cramer also likes the stock of Magellan Midstream Partners, a pipeline play that he said can increase its distribution and add pipe to help transport the increasing outflows at these prices.
President Donald Trump's regulation rollback will also boost profits for the pipeline companies, Cramer said, calling them "the biggest winners from the Trump administration."
So as the push-pull of supply and demand stalls oil from breaking through its makeshift $53 ceiling, Cramer's advice is to trim your positions in any oil producers' stocks.
"But the pipeline stocks? As more and more crude gets discovered, these are some of the best remaining Trump trades out there. I would buy them aggressively," Cramer said.
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