Run Your Own Profitable Oil Refinery By Hedging 3 ETFs

From guest blogger Richard Bloch.....

Want to profit from high oil refining margins? You can almost run your own oil refinery, hedging your output through three ETFs that track crude oil, heating oil, and gasoline. At a very basic level, refining oil is easy to understand. You buy crude oil and refine it into various products. If you sell those products for more than the cost of the crude oil, you make a profit.

Although there are many nuances to this business - different grades of oil, seasonal demand patterns, and dozens of different refined products each with their own price - there's a simple way to approximate the profit margin for refining oil. It's called the "crack spread," which gets its name from the refining process itself because you "crack" complex crude hydrocarbon molecules into usable products.

There are several versions of this spread. One popular spread is called the 3:2:1 crack spread. Here's how it works. Three barrels of WTI crude oil yield one barrel of heating oil and two barrels of gasoline. But the easy way of calculating it is to divide by three. Assume that one barrel of crude oil (42 gallons) yields one-third of a barrel of heating oil (14 gallons) and two-thirds of a barrel of gasoline (28 gallons) as shown here:

Calculating the spread

Here how this 3:2:1 crack spread was priced as of Friday, February 3

WTI Crude oil: $97.84 per barrel

Heating oil: 3.114 per gallon x 14 gallons = $43.59

Gasoline: 2.914 per gallon x 28 gallons = $81.59

Total heating oil and gasoline revenues: $43.59 + $81.59 = $125.18

Less cost of crude oil: $97.84

NET PROFIT = $27.34

Is that a lot? Let's take a look at that spread over the past 18 months.

Yeah, that seems like a lot, but it's certainly not as much as it was in September.

Three ETFs to profit from the crack spread

When the spread is going up, you'd do well to be buying gasoline and heating oil, while simultaneously selling crude oil.

You can do this through trading three ETFs in the 3:2:1 ratio outlined above. These include

• US Heating Oil Fund (UHN)
• US Gasoline Fund (UGA)
• US Oil Fund (USO)

These ETFs hold nearby futures contracts, so if you think the spread is going to go up, you might go long the spread with the following trade:

Long the crack spread

• Buy $10,000 of UHN
• Buy $20,000 of UGA
• Sell $30,000 of USO

I would adjust this position monthly to maintain that 3:2:1 ratio.

If you think the spread is going down instead -- as it did in September last year, you'd benefit from shorting the spread with the opposite trade:

Short the crack spread

• Sell $10,000 of UHN
• Sell $20,000 of UGA
• Buy $30,000 of USO

Riding the crack spread for fun and profit

How would this approach have performed over the past year? Well we can certainly assume that none of us can pick an exact top or bottom. So let's look at the spread chart again and make some assumptions about where going long or short this spread might have made sense based on trends at the time.

On February 1, 2011 you note the spread is rising, so you buy $10,000 of UHN and $20,000 of UGA while shorting $30,000 of USO. You'd treat each month as a separate trade so you can maintain the 3:2:1 ratio.

On October 3, the spread is appears to be declining. Now you short the crack spread by buying crude oil and selling heating oil and gasoline, once again resetting your position each month to stay within the 3:2:1 ratio.

Finally, on January 3, 2012, you switch and go long the spread once again, closing position on February 1.

This table shows the results for each month's trade, the profit of each position, and the net results.

The months highlighted in yellow were trades for being long the spread. The ones in purple are months trading the spread from the short side.

Here's a chart showing the net profit of your positions throughout the year.

No it's not perfect, but when the spread is trending, you can make a fairly decent gain. The profits really rose as the spread switched direction in October.

If you prefer, you might be able to use options for the USO part of your spread. These options are fairly liquid, but there are no options for UHN, and UGA options are too thinly traded to be of much use.

You don't need to be in the oil business to capitalize on the crack spread. Easy? Well no, nothing in the oil market is easy, but this could be a pretty reliable ongoing trade if you follow the trend.

Disclosure:  Richard Bloch has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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ONG: Crude Oil Weekly Technical Outlook For Saturday February 4th

Here is the weekly call from the great staff at Oil N Gold.......

Crude oil dipped to as low as 95.44 last week but formed a temporary there and recovered. Initial bias is neutral this week first. On the downside, below 95.44 will bring another decline but after all, we'd we'd expect strong support from 92.52 cluster support (38.2% retracement of 74.95 to 103.74 at 92.74). to contain downside and bring rebound. Meanwhile above 101.29 will be the first signal that recent consolidative trading has finished and flip bias back to the upside for a test on 103.74 resistance.

In the bigger picture, pull back from 114.83 was completed at 74.95 already and medium term rally from 33.2 is not finished yet. We'd tentatively treat rise from 74.95 as resumption of such rally. Sustained break of 114.83 will target 61.8% projection of 33.2 to 114.83 from 74.95 at 125.40. On the downside, though, break of 92.52 support will indicate that correction pattern from 114.83 is going to extend further with another falling leg to 74.95 and below before completion.

In the long term picture, crude oil is in a long term consolidation pattern from 147.27, with first wave completed at 33.2. The corrective structure of the rise from 33.2 indicates that it's second wave of the consolidation pattern. While it could make another high above 114.83, we'd anticipate strong resistance ahead of 147.24 to bring reversal for the third leg of the consolidation pattern.

Nymex Crude Oil Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

CME Releases 2012 Product Expiration Calendar

If you are serious about trading energy stocks and products you need to post this in or on your calendar. One of the main reasons for failure for all newcomers to the commodity trading world is lack of understanding expiration dates.

Here you will find key trading information, including last trade and notice days as well as Exchange holidays, in the annual Energy Expiration Calendar published by CME Group.

CME Group offers the most extensive and liquid energy complex in the world, including Light Sweet Crude Oil (WTI), Natural Gas (Henry Hub), petroleum, and electricity products. Many of our contracts are benchmarks that set the price for these resources worldwide. From the world's largest industrial companies to financial institutions, our diverse universe of participants clear an average daily volume of 1.5 million energy contracts every day on CME Globex, through CME ClearPort or on our trading floor.

Here is the 2012 CME Energy Product Expiration Calendar

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Is The Double Top in For Crude Oil?

Only our longer term monthly Trade Triangle for crude oil remains positive on this market. The move today below the $98 support level puts this market in jeopardy of further weakness. A close below the $93.50 level seen on December 18th would confirm a double top pivot point formation, which would measure down to the $84 a barrel level.

We do remain longer term positive on this market, however it needs to move and close over resistance at $100 to get its upside momentum into high gear. With only our monthly Trade Triangle in positive mode, we expect we will see further market consolidation in crude oil. Long term traders should be long this market with appropriate money management stops.

March crude oil closed down $1.24 a barrel at $96.36 today. Prices closed nearer the session low today and hit another fresh six week low. Crude oil bulls are fading. Prices are in a four week old downtrend on the daily bar chart. The next near term upside price breakout objective for the crude oil bulls is producing a close above psychological technical resistance at $100.00 a barrel.

The gold market moved to its best levels since December 2nd, however it is at major resistance between the $1760 and $1800 levels. With our long term monthly Trade Triangle still in a negative mode, we cannot get excited about this market at the moment. We are not super bearish on this metal, however we just need further confirmation with the tools we know are successful in trading gold. Long term term traders should be in short positions in gold with appropriate money management stops. Intermediate term traders should be on the sidelines.

April gold futures closed up $9.40 an ounce at $1,758.90 today. Prices closed nearer the session high today and hit a fresh two month high. Gold managed gains today despite bearish “outside markets” that saw a firmer U.S. dollar index and sharply lower crude oil prices. Yet, gold rallied anyway on its technical strength. Gold bulls have the solid overall near term technical advantage and still have upside near term technical momentum on their side. A steep five week old uptrend is in place on the daily bar chart.

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Natural Gas Spot Prices Near 10 Year Lows Amid Warm Weather

 Natural gas prices have continued their downward trend this winter as a result of warmer than normal temperatures, ample natural gas in storage, and growing production. Population weighted heating degree days since November 1, 2011 are down 12% nationally from the 30 year average. Total working natural gas in underground storage in the lower 48 states was 3,098 Bcf for the week ending January 20, 21% above the storage levels from one year ago. Daily dry gas production averaged about 64.2 billion cubic feet per day (Bcfd) in January, up almost 10% from last January.

Click on the tab headers below to see charts highlighting factors affecting natural gas prices.

Spot Prices      Weather       Storage         Production       Weather Outlook        Futures Prices

Average spot natural gas prices for January were $2.68/MMBtu. Spot natural gas prices in January 2012 reached their lowest level in 10 years except for a 4-day period over the Labor Day weekend in 2009.


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Crude Oil Supply Gains Puts Crude Oil Bulls on Their Backs.....Again!

Crude oil futures tanked today after supplies spiked up by 4 + million barrels. This after the Bloomberg News Survey forecasted a 2.6 million barrel gain.

Crude oil for the past week and a half has lacked any real cohesive direction, in our opinion. With a Score of -55, it reflects a true trading range. We believe we are now at the lower levels of the trading range and would not be surprised to see a pop to the upside.

We still remain longer term positive on this market and expect to see it make some new highs soon, however it must move over resistance at $102 to get its upside momentum into high gear.

With our daily and monthly Trade Triangles in positive modes, we expect we will see further market consolidation in crude oil. Long term traders should be long this market with appropriate money management stops.

Crude oil closed lower on Wednesday and the low range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near term.

If March renews January's decline, December's low crossing at 92.95 is the next downside target. Closes above the reaction high crossing at 101.39 are needed to confirm that a short term low has been posted.

First resistance is the reaction high crossing at 101.39. Second resistance is the reaction high crossing at 102.24. First support is last Monday's low crossing at 97.40. Second support is December's low crossing at 92.95.

Here is a preview of the MarketClub Trade Triangle Chart Analysis and Smart Scan technology

Global Natural Gas Production Doubled Between 1980 and 2010

Global dry natural gas production increased 110% between 1980 and 2010, from 53 trillion cubic feet (Tcf) in 1980 to 112 Tcf in 2010. The combined share of North America and the Former Soviet Union, the top two producing regions during the time period, fell from 72% in 1980 to 49% in 2010. While all regions increased natural gas production between 1980 and 2010, the Middle East grew most rapidly, increasing more than eleven fold.

Natural gas production in the United States has grown rapidly in the past several years. Rapid increases in U.S. natural gas production from shale gas formations resulted from widespread application of two key technologies: horizontal drilling and hydraulic fracturing.

Shale gas resources, which have recently provided a major boost to U.S. natural gas production, are also available in other regions of the world. An initial assessment of 48 shale gas basins in over 30 foreign countries includes 5,760 Tcf of technically recoverable shale gas resources.

Just click here for your FREE trend analysis of FCG, the Natural Gas ETF

Crude Oil Bulls Can't Seem to Take Advantage of Price Action Above $100

Crude oil closed down $0.42 a barrel at $98.35 today. Prices closed nearer the session low today and scored a bearish “outside day” down on the daily bar chart. Prices were pressured by a firmer U.S. dollar index today. Crude oil bulls have the overall near term technical advantage. However, the going does get tough for the bulls once prices move above the key $100.00 level.

Gold futures closed up $4.00 an ounce at $1,783.30 today. Prices closed near mid range today, hit a fresh seven week high and closed at a bullish monthly high close. Gold bulls still have the solid overall near term technical advantage and still have upside near term technical momentum. A steep four week old uptrend is in place on the daily bar chart.

Natural gas closed down 20.9 cents at $2.504 today. Prices closed nearer the session low today. Bulls faded today. Bears have the overall near term technical advantage. The next upside price breakout objective for the bulls is closing prices above major psychological resistance at $3.00.

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The Long Term Bull Market "E" Wave Count

I have to be honest that I am grappling with a few possible counts since the March 2009 Bull market commenced in terms of the big picture.

With Elliott Wave Analysis, you have to anticipate, monitor, and then adjust.  Most of the time I go with my instinct and then only adjust if it looks like I was way off the tracks.  The only time I tend to get way off the tracks is when I read too many opinions, so I’ve shut myself off from reading other’s opinions and below is my gut  right now:

I know I have labeled one option as the 1074 lows being primary wave 2, with primary wave 3 underway since (1074 to current).  However, I have to admit my instincts still tell me that the 1074 lows may have been primary wave 4, and we are in primary wave 5 up now.

Whether it was 2 or 4 is not super important short term because we would either be in a Primary 3 up or Primary 5 up now which is bullish either way.  However… if it’s a primary 5 up, then it changes the longer term pictures and also 5th waves can be difficult to assess.

There is another rule that says wave 3 can’t be the shortest of waves 1, 3 and 5 (All up waves).  Therefore, if we are in primary 5 up now from the 1074 lows then we can’t rally more than 360 points from the 1074 lows (Wave 3 was 360 points).

So here is the possible count if this is Primary 5 from the March 2009 lows with normal fibonacci relationships:

666 to 1221-  1

1221-1010- 2 (38% of 1)

1010-1370- 3 (61.8% of 1)

1370-1074- 4 (38% of 1-3)

1074-??? – 5 (Normally 50-61% of 1-3)

So if wave 5 cant  be longer than wave 3, and let’s say wave 5 is 50% of waves 1-3… that would put a top target at about 1426 on the SP 500 index.  That would make wave 5 just shorter than wave 3 following the rules and would complete 5 full waves.

So that is what I’m grappling with because if this is a primary wave 5 up from the Oct 2011 lows of Primary 4… then we would need to be on our toes for a bull market pivot top.  If its primary wave 3 up , then we have much further to stretch.

Right now, the evidence is leaning to this being primary 5 up… below is my chart and I will keep you updated.  The volume, MACD, and other indicators will help point the way.

Note how the volume has been declining on every primary wave rally 1, 3, and 5 so far.  Note how the MACD line uptrends on each primary wave rally as it is now…..Stay tuned.

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Crude Oil, Gold and Natural Gas All Start The Week Lower

Crude oil closed lower on Monday and the low range close sets the stage for a steady to lower opening on Tuesday. March crude oil declined over Greece's debt and U.S. consumer spending stalled raising concerns that economic growth and fuel demand will decline. Stochastics and the RSI are neutral to bullish signaling that sideways to higher prices are possible near term. Closes above the reaction high crossing at 102.24 are needed to confirm that a short term low has been posted. If March renews January's decline, December's low crossing at 92.95 is the next downside target. First resistance is the reaction high crossing at 102.24. Second resistance is this month's high crossing at 103.90. First support is last Monday's low crossing at 97.40. Second support is December's low crossing at 92.95.

The Fed, the S&P 500, & Why Gold Is Shining Bright

Gold closed slightly lower due to light profit taking on Monday as it consolidates some of the rally off December's low. The mid range close sets the stage for a steady opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signaling that sideways to higher prices are possible near term. If April extends the rally off December's low, the 62% retracement level of the September-December decline crossing at 1772.28 is the next upside target. Closes below the 20 day moving average crossing at 1654.80 would confirm that a short term top has been posted. First resistance is today's high crossing at 1742.80. Second resistance is the 62% retracement level of the September-December decline crossing at 1772.80. First support is the 10 day moving average crossing at 1689.30. Second support is the 20 day moving average crossing at 1654.80.

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Natural gas closed lower on Monday as it consolidated some of the rally off last week's low. Stochastics and the RSI remain neutral to bullish hinting that a low might be in or is near. Closes above the 20 day moving average crossing at 2.770 are needed to confirm that a short term low has been posted. If March renews the multi year decline, monthly support crossing at 1.960 is the next downside target. First resistance is the 20 day moving average crossing at 2.770. Second resistance is January's high crossing at 3.153. First support is last Monday's low crossing at 2.289. Second support is monthly support crossing at 1.960.

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