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The Market's Measure
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Good News And Bad News For A Refiner

Another season comes to a close.

So, do you want the good news first or the bad news? No, wait, let’s back up a little.

In our October 26 column, we highlighted a seasonal trade in the oil refinery business. Historically, the spread between crude oil and distillate prices tends to widen between October and February. Simply put, crude oil cheapens in relation to gasoline and fuel oils, which is a boon to refiners.

Back in October, with crude trading at $59, this “crack spread” was $14 per barrel. At that time, the share price for Valero Energy Corp. (NYSE: VLO), the nation’s largest pure refiner, was about $59 and technically poised to reach $71 over the season. Our article posited VLO as a crack spread proxy for investors chary of venturing into the futures markets. Thus, in a strange sort of switcheroo, a stock became an “alternative investment.”

The crack spread indeed widened after our column ran. So much so that VLO’s seasonal price objective hove into view by December 29. On that day, our column pointed to the crack spread’s expansion to $17 and VLO’s rise to $69. Given the speed and degree of VLO’s price spike, we suggested traders consider peeling off at least 80 percent of their positions. Two trading days later, VLO topped out at $71.

That’s the good news. Or, it could have been if you took your money off the table.

That’s where the bad news comes in. VLO’s been slipping since the top of the year. The stock’s now dancing on support at its 50-day moving average around $65 and looks likely to weaken further from here. A slide back to the $60 level is in the cards.


If you were in your cups and didn’t trim your exposure around the holidays, now’s the time to sober up and do it.

Brad Zigler is REP./WealthManagement'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.

TAGS: Equities
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