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Tickers in this Article: USO, XES, VLO, TSO, SUN, WNR
The price of crude is beginning to look like it might be setting itself up for a spill in the short-term.

The United States Oil Fund ETF (NYSE:USO) has soared 39.1% since hitting a 52-week low in mid-February. This run is somewhat unexpected given lagging underlying demand. It is also opening up opportunities for investors.

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Excessive Inventory
On May 7, the price of crude broke above $58 for the first time in 2009. I am a bit leery of this rally given the lack of a fundamental basis to support the climb. On May 6, the Energy Department reported that crude inventories reached their highest level in 18 years.

The move up in crude appears to be based more on the optimism that equities have been experiencing recently as well as lower-than-expected increases in crude stockpiles. Over the long run, I believe the price of crude will recover, but this current rally may be a bit premature. (For more, see A Guide To Investing In Oil Markets.)

A Refined Opportunity
Where the price of oil stands now, there is a better chance that oil refinery stocks will outperform the USO ETF in the coming months. Investors who are of a similar sentiment could benefit by selling USO short and taking a long position in an ETF such as the SPDR S&P Oil & Gas Equipment & Services ETF (NYSE:XES), which contains refining exposure.

Investors who like the idea of refineries but are not sold on using an ETF could look at companies such as Valero (NYSE:VLO), Tesoro (NYSE:TSO), Sunoco (NYSE:SUN) and Western Refining (NYSE:WNR). The steep drop in crude prices from last summer has helped each of these refineries beef up its refining margins as input costs have drastically decreased.

XES, as well as these four refinery stocks, experienced a dip May 7 as crude reached a new high for 2009. This is not a coincidence. It does spell opportunity, however.

The Bottom Line
Investing in crude for the long term may very well turn out to be a sound play. However, in the short term I believe investors would be better served by investing in the oil refinery stocks and shorting an oil ETF such as USO. The underlying fundamentals tied to the recent surge in the price of crude lead me to believe that we could see a pullback in the not-too-distant future.

For more, see Oil And Gas Industry Primer.

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