Oil Prices and Gasoline Prices: An Interesting Divergence

Jeff Miller
Those trading energy stocks must always follow crude oil prices. This is especially important for investors in Transocean, Inc. (RIG) and Global SantaFe (GSF), both stocks that we hold in trading and individual portfolios.
Even though the front-month spot price has a lot of variation, the energy ETF's seem to follow the front month. This makes no sense for stocks that are "upstream" like RIG and GSF, but it fits the pattern.
We have observed that futures trading sometimes seems irrational. The common scenario is that there is some problem with refinery capacity. When these stories have hit in the past, often due to weather, crude oil futures have spiked.
Economic analysis suggests that the opposite should occur. If refineries have reduced capacity, the demand for crude is reduced. That demand curve should shift, leading to lower crude prices.
The countervailing force is trade in the "crack spread." Traders study and trade the relationship between the price of a barrel of oil and the price of refined products, using ratios that vary according to the season. When the crack spread reaches an extreme, there is a mean-reverting trade. This causes buys in crude.
Today we saw an interesting divergence, noted in the Wall Street Journal. Crude prices fell in the face of reduced refinery capacity. This is new!
At "A Dash" we continue to believe that investors in energy stocks can use these moves to adjust positions. If the investor is focused on the long-term demand for future drilling, any dip provides an opportunity.
Summary
Equity investors do not study the futures markets and the forces behind that trading. Those that do can gain a significant advantage in their stock trading.