I Like Oil, But I Love The Refiners! (Commodity:CL1:COM)

Oil is very important, but it’s the refiners that we are focused on, let me explain

Even as everyone is certain that if Israel attacks Iran, oil will jump to 190 per share. This was reported in Seeking Alpha today, quoting Bank of America’s analysts. As time goes on and as the war cabinet recently had its 4th meeting, it is pretty clear that they are calibrating the response to show Israel’s abilities as a deterrent but not enough to spark an escalation. Ultimately, what will be, I have no idea, and it isn’t material to the concept here. What is material is that oil is having a countertrend consolidation that I have been focused on for about 6 trading days. It starts with the price of oil, and it ends with the refiners, their product Gasoline, Jet fuel, Diesel, etc. are refined from oil. My premise isn’t anything new, when oil goes up, refiners can charge more for gasoline. This is known as the crack spread. It is fortunate for refiners, that they buy “old” Oil for 84 per barrel, but on the day they sell gasoline, they use the spot price of Oil (87 let’s say) and make an even tidier profit. Alas, when oil falls, they get the dearer spot price as well and their margin (crack spread) suffers. Of course, they can use futures to smooth out input costs, and that is what provides the base of pricing for financial markets. Still, crude affects the price of refiner stocks, very immediately because that is what traders do. As an aside, there is a price relationship between gold and silver, which in a way was the inspiration for the title of this article.

I was being playful with the title, but it does impart a meaning

The title was just riffing on a previous article that I wrote which had a similar theme, I Love Gold But I Am Buying Silver. This is more than just being a bit cheeky, the notion that the movement of a commodity can affect something different. Gold has been moving up and silver was lagging, and for quite a while. Then I started to observe that silver was catching up and at times outperforming gold. Here too, oil will affect the stock price of the refiners, but in this case, I confirmed that by observing that the refiners were already rolling over near the peak of oil. So I started plotting

Let me set up the premise for you, 10 days ago, I had a premise that the price of WTI Oil was getting ahead of itself. Even though everything was lining up logically for higher oil prices, commodities are notoriously volatile. I conjectured that the huge amount of speculation in a commodity on top of end-users can swing around the price that creates such dislocations, so when just a few weeks ago WTI hit a peak and 87, it seemed to me that the run-up in the price has gone too far. My thinking was that the price would likely peak at the low 90s during driving season, and while we are already headed into driving season very soon, we are nowhere near the peak, and any little selling pressure will set off a countertrend retreat in Oil, and the refiners. As an illustration, let me start with a 1-month chart of WTI oil (CL1:COM).

As you can see, on April 5 WTI (CL!:COM)was already rolling over, and we are already almost 6% below the peak, but everyone is sure that oil will reach 200 any minute. Yet look at this chart of Phillips 66 (PSX), a large refiner, this chart was created on April 9, and I shared it with Investment Group Members. By the way, the high for April 9, was 86.98, I had a hunch and I went looking for an answer in the one place that is a great predictor of where the price of oil would be going – a refiner like PSX.

Here is the same chart today…

The price of PSX in the post-market ended at 156.71 as you see on the right-hand side showing that it violated this months-long support level, I am not 100% certain that it will reach the next more substantial support level, but that is my premise. WTI has been trading in the high 70s and low 80s for months and I believe traders will send it back to that level, as traders press their shorts. Here is the 6-month chart of WTI. As you can see, support at 80 for WTI is pretty paltry, so naturally, once we see an 80 handle, we should see an attempt to break into the high-70s. Here’s the thing, In the end, I do see WTI reaching for low 90s this summer and I think this dip lower will have a small window, perhaps a week to 3 weeks.

What will make WTI drop another 9%?

What will make WTI drop another 9% 83 to 77? That’s easy, the narrative will change to match the price of WTI. That is happening already, check out this article in Seeking Alpha: U.S. crude oil drops by most since January as supplies rise more than expected. This was published on the same day as the previous Seeking Alpha article. The first, in fairness, was just reporting on what Bank of America was saying, and this article was just reporting the facts. My annotation on this article is that these monthly supply numbers are very noisy, and it is only natural to match these reported surpluses to what is happening to the price of oil. Here is an interesting paragraph – “The Energy Information Administration reported a fourth straight weekly build in U.S. commercial crude inventories, up by a higher than expected 2.7M barrels for the week ended April 12, while the report also showed larger than forecast weekly supply declines of 1.2M barrels for gasoline and 2.8M barrels for distillates“. The editors are correct in reporting the rise in the surplus, but what is going on here? Why is the gasoline supply going down while the crude is rising? I think the refiners are not taking delivery of the expensive oil right now, and they are selling the cheaper gasoline they had on hand from when the oil was priced at 77. They are the super geniuses of oil, and they will wait for WTI to hit 90 to sell the current expensive inventory. In any case, maybe I am reading too much into this. The premise is simple, the refiners have already foretold that oil is coming down in price. I say let’s keep a very close eye on this pair, Oil and the refiners, one of our smart investment group members suggested the Refiners ETF (CRAC), some smaller refiners might swing with more volatility, in the past I traded HF Sinclair (DINO), and the chart looks very similar. Here is the 6-month chart of DINO and I think 55 is a good level.

Now as far as my trades, I am not doing great with either the Triple Levered Nasdaq-100 ETF (TQQQ) or the Triple Levered Chips ETF (SOXL) but I believe that this sharp sell-off has de-risked the tech titans, so I am going to stick with it, I am waiting until Friday to roll my calls down and out heading into heavy earnings season next week where I believe 177 of the S+P 500 stocks will be reporting. Also, very importantly, 5 of the 6 remaining tech titans are reporting. I believe these 5 and the remaining 172 other stocks will ignite a broad base rally to end April in a very nice way, perhaps even run into May. All of the angst we are experiencing because Jay Powell threw in the towel on early cuts because the economy is too strong? Doesn’t it follow that earnings will be fantastic? Also, all of this selling has squeezed out the weak hands that will come piling back into the stocks they have been selling. I entered and reduced my $SLV today, early in trading when it was up. $SLV continues to outperform gold, and I will likely be completely out before the week is done. I don’t think the silver trade is done, it could mimic oil, and that is why I am trimming the position now. I will gladly get back in if it follows oil down, I believe it will follow it back up. I also got long Celsius (CELH), I believe I spoke about it in the last article, I started at the 80 strike and then rolled it down to 75, and my expiration is out to July.

Ok, good luck everyone. Remember to wait for oil to hit 80, then start planning to get in the refiners.