The Market's Measure
market's measure

Alternative Treats for Halloween and Beyond

A good trade since summer, what’s ahead for oil?

I don’t do retail. By that I mean I don’t like shopping in stores for clothes, furnishings, whatever. I’m especially chary of visiting these emporiums after Labor Day for fear of “holiday creep.” Am I a curmudgeon or does it seem too soon to put up Christmas goods in September?

Well, I may guilty of the very practice I abhor. Back in early August, I wrote of crude oil as a portfolio diversifier in “Oil’s A Buy Again.” I was looking for a $61-$62 price objective for West Texas Intermediate, a light grade favored for gasoline production. Back then, oil was wobbling around the $49 level. As of Halloween, WTI was trading above $54—about halfway towards its projected price. Granted, I didn’t lay down a time frame for oil to hit its objective, but I’ll venture to say that its upward momentum is likely to carry through the holiday season.

So, forget about buying those Chia Pets stocking stuffers. You may want to consider purchasing oil exchange traded fund shares instead. Here’s how they’ve stacked up since they appeared in the August column:

Oil’s been a good trade so far, as evidenced by the outperformance of the futures-tracking USO and USL portfolios, but oil refiners—proxied by the VanEck Vectors Oil Refiners ETF (NYSE Arca: CRAK)—has done even better. We highlighted the CRAK portfolio just before trick-or-treaters hit the streets in “A Cracking Good Time In The Oil Business.” In that article, we pointed to the “crack spread” as a potential driver of the ETF’s price through the winter.

Buying the crack spread—selling crude oil futures while buying both gasoline and fuel oil futures—is a favorite seasonal moneymaker for commodity traders. Since October 24, the spread’s gained about three percent with another four months to go.

So how can crack spreaders hope to make money if they’re selling crude oil short? Because they’re also buying, in ratio, gasoline and fuel oil. If the distillates remain stronger than crude, the spread’s a winner. Last season, for example, WTI actually rose by 10 percent while gasoline’s price spiked 18 percent. Together with the appreciation in the fuel oil contract, the spread improved by better than 20 percent.

And for oil ETF holders? The intermediate price objective for the United States 12-Month Oil ETF (NYSE Arca: USL) is about $20—nearly a 15 percent gain from its early August level. Cautious traders may likely take their seed capital off the table if, and when, that objective is reached, leaving only the market’s money at risk through the winter season. ‘Tis the season!

Brad Zigler is WealthManagement.com’s Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange’s (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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