This oil refiner could get a boost as summer approaches. Using options to capitalize on the gains
It's been a good year for stocks. The S & P 500 is up more than 9% year to date. It's been a better year for energy stocks. The Energy Select Sector SPDR Fund (XLE) , which is made up of S & P 500 companies that develop or produce energy products, is up almost 17%. The move higher for energy stocks comes as West Texas Intermediate crude oil approaches the mid-2022 highs of $88.31 per barrel. Brent , while still well below its 2022 highs of $127.98, appears poised to test the late 2023 highs of $96.55 per barrel. Theoretically, one can make bullish bets on oil using an ETF, such as the United States Oil Fund (USO) . However, I would caution against using this as an investment vehicle to make a long-term bullish bet on oil. The reason for this is that there is generally a "roll-cost," as the underlying fund must continuously adjust or "roll" near-term oil futures contracts to longer-dated ones. Consequently, USO will not replicate the price of spot precisely and performance will be dragged down over time. So, while it can be used to speculate on short-term price action in the commodity for those who cannot access the futures market, it is wiser to make longer-term investments in companies in the sector or a specific industry within that sector. SPR decline As the chart below illustrates, the country's Strategic Petroleum Reserve declined sharply in the lead-up to the 2022 midterm elections – keeping oil prices in check. As the 2024 general election looms, investors might be concerned the Biden administration could once again access the reserves to put a cap on prices. While oil prices were somewhat kept in check in mid-2022, and the XLE did fall more than 25% between the May highs and mid-July of that year, further depleting the SPR to put a lid on crude can only work for as long as there are reserves to sell. To get exposure to the oil services industry, one could purchase Halliburton or Schlumberger . For the integrated oil companies, Kinder Morgan is a solid midstream pipeline company. For oil refining, one could choose a company such as Valero or Marathon Petroleum . Both of these have been on a tear. Chasing them here, even though summer approaches and gasoline demand should peak soon, is a bit nerve-wracking. In their defense, this is a strong period for gasoline demand. On top of that, the crack spread -- the difference between the price of a barrel of crude oil and the prices of the products it is refined into has also expanded recently. Both of these companies remain attractively priced at 9.5x earnings for Marathon and just 7.4x earnings for Valero. The trade One way to get long exposure with slightly less risk than purchasing the stock is with a diagonal call spread. Purchasing a longer-dated call option and selling higher-strike nearer-dated calls against it to offset some of the decay. The example below is the June 220, May 240 call diagonal in Marathon Petroleum. Note that MPC is expected to report first-quarter earnings on April 30. The Street is expecting $2.44 per quarter, according to FactSet. The stock popped more than 6% on Jan. 30 after Marathon posted fourth-quarter 2023 earnings, so the call I've selected as a sale in the following example is at a strike more than 9% higher than the current stock price -- in the event the stock sees a similar rally. The total cost of the spread risks just under 4.4% of the current stock price. DISCLOSURES: THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.