As the standout index (based on a percentage retracement off the March lows), the Nasdaq 100 is the most important one to focus on here. The weekly chart below reveals that it’s clawed back around 50% of its losses since late 2007.

Correction Coming

The late 2007 sell-off and subsequent rally looks like a classic 5-wave Elliott Wave Theory move, with the current rally perhaps being the fourth wave of a 5-wave downside move.

If that’s the case, the Nasdaq 100 shouldn’t close much above the trendline before the fifth wave to the downside begins. At this point, with all the indexes still bullish and under buy signals, we’ll have to wait and see how the Nasdaq 100 is acting if it gets close to the trendline, which is currently around the 1,710 area.

In any event, all the indexes are getting overbought and once the rally runs out of steam, which could happen this week, we should see a correction at least. And the way the correction unfolds will give us a better idea of what to expect over the next few months.

So with that in mind, we’ll focus on a relatively weak sector this week that could be shorted once the rally runs out of steam…

Oil Index Back Above Its 50-Week Moving Average… And Could Test The Top Of Its 10-Month Trading Range

If the stock indexes do succumb to the overbought conditions and reverse course sharply, we’ll probably hear that the recession may linger longer than expected.

If that’s the case, crude oil inventories will probably continue to rise, due to lack of demand. That would put pressure on the oil stocks. Take a look at the weekly chart of the AMEX Oil Index(AMEX: ^XOI).

Having topped out in May 2008, the index went on to give up about 55% of its value just four months later. Since reaching its lows in September, it’s climbed, but has underperformed the stock indexes, as it worked off the oversold conditions. You’ll notice that the latest move up has been unable to get above its January highs while the other stock indices continue to make new new recovery highs.

How To Play Oil’s Next Downside Move

While the stock indexes made new recovery highs in early June and then again last week, ^XOI was unable to follow suit. The chart looks to be in a bearish consolidation pattern and if that’s the case, a test or break of the lows is likely once the current rally runs its course.

The top of the consolidation pattern is around the 1,055 area and selling calls or buying puts would be a low-risk trade if it manages to get back up in that vicinity. However, if the stock indexes turn lower before that occurs, barring unforeseen problems in the oil market, it will probably continue to move lower.

In that case, the first support level is in the 845 area and then at 750, which is at the bottom of the consolidation pattern. A close below 750 would probably take it down to its next support level in the 650 area.

The two weakest-looking stocks within the $XOI are Valero Energy (NYSE: VLO) and Hess Corp (NYSE: HES).

Jim Stanton

Source: Oil Stocks Under Pressure…How to Play the Move

It is not every day we see a $10 billion company like Valero Energy (NYSE:VLO) shed 20% of its value. When it happens, it is certainly action worth investigating.

The sudden decline comes thanks to the company’s executives estimating a fifty-cent per share Q2 loss, versus $0.59 per share earlier estimates and $0.74 per share consensus projections. The jaw-dropping news sent shares of competing refiners into the dumpster as well.

Frontier Oil (NYSE:FTO) is down over 15%. CVR Energy (NYSE:CVI) is down over 17%. And Suncor (NYSE:SU) is down by 8%.

The more a company’s profits rely on refining revenues, the deeper the decline.

The day’s action has created opportunities for options investors.

Sure, things are bad at Valero, at least in the short run. But its competitors do not face such a bleak outlook.

The market makes mistakes

Valero claims its Q2 loss will be due, in part, to its temporary shutdown at its Delaware City facility as well as unfavorable margins, especially in the diesel market. There is no doubt volatile crude prices over the last six months have made managing the business extremely difficult. Margins have been anything but predictable.

Refiners must walk a thin line to reach maximum profitability. Much of their fate relies in the hands of energy traders. Creating and sustaining maximum margins takes incredible financial diligence and hedging. Get one calculation wrong and, well, just look at Valero.

But as I said, Valero’s problems are not systemic. The industry as a whole should not have dropped by such large levels today.

For options investors, it spells an opportunity to buy short-term calls. Front-month calls carry the most reward, but are the most risky.

CVR Energy’s June 7.50 calls are worth looking at. And Suncor’s June 33.00 calls are worth your time.

The best profits will come if the markets make a significant rebound off of today’s depressing action. Even if the next several weeks offer moderately bullish action, the profit potential is eye-opening.

Big, industry-wide moves like we saw today are what options investors depend on for triple-digit gains. The market does not make such big mistakes often, but when it does the profits can be spectacular.

Source: Take Advantage from the Refining Industry Fallout

Spreading Your Bet Without Losing Any Profits

Instead of outright betting on oil’s price, let’s use the spread between oil and gas. After all, some of the largest companies in the world do this. All the large oil companies (ExxonMobil -NYSE:XOM-, BP, Shell -NYSE:RDS.A-, etc.) do it by owning refineries.

Now, to be fair, most of their profits don’t come from the refinery process. But big money is still out there for the taking. Just take a look at industry leader Valero (NYSE:VLO). Last year, while it may not have been a normal environment for a energy related business, Valero brought in $119 billion in revenue.

Unfortunately, most of the money disappeared because, as a refiner, the company had to purchase the oil to process. Oil hit $147 last year, which certainly put a dent in Valero’s bottom line.

So, the question if oil is rising again, will gas and heating oil follow? And if so, by how much?

Inviting the Mathematicians to the Oil Field

The most important figure in the refinery business is something called the crack spread. Using a West Texas Intermediate (WTI) crude refining model, the ratio is three barrels of crude (cost), two barrels of gasoline (gain), and one barrel of heating oil. That’s written like this: 3-2-1. If you are using OPEC grades, which produce less gasoline, the ratio is 2-1-1.

Until you see where it’s been and where it’s going, all this info is useless. Here’s a frame of reference:

Cracking the Crack Spread

As you can see, it’s been all over the board the last few years. It even went negative at one point last year, which means the refinery loses money on every single barrel of crude it processes.

We expect, over time, that this spread will stay above $7, probably even north of $10 or $12. This is not an exact science. Not only are we guestimating, we’re using a number that is only relevant to refinery investors, not refineries.

You see, every refiner has pays a different price for its oil, and has contracts set months ahead of time for the sale of its gas and heating oil… not to mention the other products that come out of this system (coke, propane, butane, slurry, sulfur, etc.).

So every refinery has its own crack spread number. And that can vary far less than what the above example would have you believe. For instance, do you think that a refiner will take a contract to sell its products at a lower price than its contract to purchase the crude? Absolutely not. So, other than extreme cases, its unique spread will never be negative.

We found a refiner that is doing just fine, and even has a leg up on competition through a unique business pairing.

Unlikely Paring Presents a Lucrative Penny Stock Opportunity

We’re talking about CVR Energy Inc (NYSE: CVI). CVR is a domestic refiner with operations in Coffeyville, Kansas — about 100 miles from Cushing, Oklahoma, which is a major crude oil trading hub.

Its refinery business brought in $4.8 billion last year. That’s quite a bit of business for a penny stock. And that’s not even the most interesting part about this play.

The company has a second segment that accompanies this petroleum business perfectly: nitrogen fertilizer manufacturing. You might not think of these two operations as brother and sister, but I assure you they are.

There are two ways to make nitrogen fertilizer: by using coke or natural gas. Natural gas is the obvious one everyone chooses because it is convenient and easy to transport.

CVR is the exception to this rule. It uses coke from its refinery, which is located right next door to the fertilizer plant. This cuts out one of the major costs of running a fertilizer business, and coke is just a by product of its refinery business.

Both segments have been a bit volatile over the last 12 months. With oil and gas prices spiking mid-summer last year, it caused the company to become much more flexible.

CVR’s refinery business, for example, moved from a complexity of 10.3 to 12.1 last year. A refinery’s complexity is a number that describes its flexibility to maximize yields (getting the most out of every barrel of crude and staying economical). This is a fantastic complexity ratio. It beats Valero’s average, which is the lowest cost refinery business in the country.

When you combine the next-to-no cost of CVR’s fertilizer business with the efficiency of its refinery business, you get one of the most attractive companies in either industry. And right now, it’s a steal for just a little over $8 per share.

You can’t ask for a better way to play America’s two favorite vices: gas and food.

Sincerely,
Jim Nelson

Source: The Perfect Refinery Penny Play

This from Today’s Financial News:

Even with the threat of a strike, crude prices managed to dip below the crucial $40 level, the unofficial delineator between cheap and moderately priced oil. What will happen through the rest of the week is up to the United Steelworkers.

If the union, which represents some 30,000 employees and about 70% of the nation’s refinery production, votes against the proposed contract, volatility is bound to rise. If a contracted is ratified over the next day or so, then volatility and prices are likely to drop even further.

The union and the nation’s oil companies are working on a day-by-day basis, but insiders say they are getting close to a compromise. In fact, some say it looks like a strike may even be unlikely. But unions have surprised us before and will certainly do it again.

Destroying what’s left

What makes a worker want to go on strike in this economic downturn, especially after they were promised a raise, remains out of my grasp. But then again, what makes unions tick in the first place has always been a mystery to me. They drove large manufacturers out of my hometown, took Detroit to its knees and now they are threatening to tear at the throat of the nation’s last great blue-collar profit maker.

If these workers get the guts to strike, as an investor, you have a few options. You can pick a major oil refiner, like Valero (NYSE:VLO), the nation’s largest, and short it. After all, even a short-term strike will pull down its quarterly profits.

Another option is to play the broader refining industry through an ETF like United States Gasoline Fund (NYSE:UGA). As production falls, gasoline prices will rise.

Finally, you can play the broader energy market through a fund like the Ultra Oil and Gas ProShares (NYSE:DIG). If shares go up, its price will jump at a two-to-one ratio, at least on a day-to-day basis. Be careful with these ETFs as they are calculated on a single day, not a long-term trend. With the right level of volatility, these shares can actually drop in value even as prices rise over the long-term.  They do it quite often.

But do not be certain crude prices will rise because of a refinery-level strike. Chances are, it could be just the opposite. We already have too much oil on the market. If refineries shut down, the supply glut will be even worse. In that case, take the Ultrashort Oil and Gas ProShares (NYSE:DIG).

No matter which slant you take or which way you choose to invest, one thing is certain. The nation’s largest companies are once again out of the predictable hands of a free market. They have been seized by unions and greedy politicians.

It makes the job of an investor even harder, but the profit opportunity is there just the same.

Source: Playing a potential refinery strike

This from Investment U:

When I started driving, gasoline still contained lead and regular was selling for 29 cents a gallon. My father remembers 10 cents a gallon.

While it’s highly unlikely we’ll ever see those prices again, you could see gasoline below $1 a gallon, and it just might hit $0.75 a gallon. It might not be in time for Christmas, but the Easter Bunny might leave it in your Easter Basket.

That’s not just wishful thinking on my part: The International Energy Agency’s (IEA) most recent monthly forecast (released just yesterday) indicates year-over-year global oil demand will shrink in 2008 for the first time in the last 25 years.

Why? Developed nations are skidding into recession and emerging nations have hit the brake pedal on economic growth. And when the United States – by far the largest oil user in the world – cuts back, the ripple effect is devastating to producers.

Oil-laden tankers are backed up at U.S. oil unloading terminals, waiting to unload. At the same time, the nation’s most recent oil inventory report shows that storage tanks are brimming with crude oil, gasoline and heating oil. But that doesn’t mean there’s no money to be made here. In fact there are a number of opportunities to profit in oil right now.

Global Oil Demand – OPEC Cuts Production

OPEC is scrambling to cut production of oil. Chances are good that they won’t cut far enough or fast enough. Supply destruction will continue to lag demand destruction for the foreseeable future. And that sets the stage for a continued softening of pump prices as well as heating oil.

And then, of course, there will be the cheaters: You can expect rogues like Venezuela and Iran to continue to pump and sell as much oil as they can possibly suck out of the ground, since there is little production accounting oversight on the part of OPEC. It was a big problem the last time we had an oil crisis back in the 1970s.

How low could it go? Merrill Lynch is on record predicting $25 a barrel. It has a fairly good chance to go even lower, before supply cuts catch up with global demand slowdown, which is still occurring.

How long will it stay low? It’s hard to say, but any increase in global economic growth would provide a boost in demand and a subsequent rise in the price of oil. Current economic forecasts, while mixed, don’t show much of an increase until the latter half of 2009 – or even early 2010.

For now, though, demand is still falling, with October alone registering a steep 8.3% decline in crude prices. Simple math says that if crude prices are cut in half from here, so, too, could the price at the pump. Car dealers with rows of gas guzzling SUVs on their lots would be jumping for joy.

But just like $147 a barrel was artificially high, so, too, would be $20 a barrel on the low side. As prices begin to stabilize in late 2009 or early 2010, oil will likely return to a trading range of $80 to $100 a barrel. It would begin to slowly rise from there as the global economy climbs out of recession and economic growth rekindles.

2 Places to Put Your Gas-Savings Cash

Naturally, there are a few ways to put your growing mound of gas-saving cash to work:

• Shares of Autonation, Inc. (NYSE:AN), one of the largest car dealer networks in the country, are off 50% from their 52-week highs. Any sustained reduction in the price of gasoline will likely have a positive impact on car sales, particularly in the hard-to-move segments of the market like low-mileage SUVs, vans and pickups.
• A more direct way to play this would be to pick up a few shares of Valero Energy Corp. (NYSE:VLO) that’s been bouncing along in a tight trading range of $15 to $20 a share since mid-October. Its profits are tied directly to the spread between the price of crude oil and the price of refined products (known as the crack spread). A widening spread bodes well for refiners like Valero.

While I’m not sure I’d be running out to buy a big SUV anytime soon, it’ll certainly be easier on the wallet when pulling up to the pump. But don’t get too comfortable with cheap gasoline. Prices will eventually revert to their natural mean. And in the case of oil, it will eventually be higher.

Source: Global Oil Demand: Are You Ready for Gasoline Under a Buck a Gallon?

Last week’s crude and gasoline inventories dropped more than expected as the effects of Hurricane Gustav resulted in some production disruptions. Gustav, which struck last month, was the fourth-most-destructive storm to hit the United States, causing $20 billion in damages. And then came Hurricane Ike.

Ike made landfall in the Galveston area of the U.S. Gulf Coast on in the pre-dawn hours Saturday (the day I was penning this column) as a Category 2 storm with winds hitting 110 miles per hour.  Ike’s path toward Houston makes it the first storm to hit a major U.S. metropolitan area since Hurricane Katrina eviscerated New Orleans in 2005, Bloomberg News reported.

We won’t know how much direct damage those high winds from Hurricane Ike will cause for several days at least. From the initial reports, the results appear to be devastating.

But the indirect costs are already appearing.

At least 13 Texas refineries shut down as Ike approached, the equivalent of more than 19% of the nation’s oil-refining capacity, Bloomberg said. That will certainly limit fuel deliveries across the country in the days and weeks to come – a reality that will likely result in higher gasoline and energy prices.W

The Gulf Coast refineries and ports are the source of about 50% of the oil and gasoline used in the eastern half of the U.S. market. Refineries operated by Exxon Mobil Corp. (NYSE:XOM), Valero Energy Corp. (NYSE:VLO), ConocoPhillips (NYSE:COP), and Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) were affected.

The bottom line: Gasoline shortages may occur across the southern United States and up to Washington because of the production losses caused first by Hurricane Gustav and now by Hurricane Ike, a U.S. Energy Department official told journalists on a conference call Friday.

“We expect to see constrained supplies of refined products,” said Kevin Kolevar, the Energy Department’s assistant secretary for electricity delivery and energy reliability. “The administration will utilize every tool at our disposal to lessen the likelihood of limited fuel supplies,” including tapping the Strategic Petroleum Reserve.

In the days to come, traders will monitor the situation closely as operators assess the damage (in both equipment loss and duration). Now that Labor Day has passed, many so-called ‘experts’ expect the demand for gasoline to weaken as the peak vacation period ends and most kids have returned to school, another catalyst for low energy prices (if only the Atlantic hurricane season would cooperate).

Source: Hurricane Ike is the Latest Wild Card in the “Guess the Gasoline Price Game”

The 52-week low is $29.70, and the Wall Street analyst community remains very negative on the shares of the San Antonio-based company – even though it beat analysts admittedly reduced expectations for both revenue and earning.

The $64 million question (*) is this: Is it time to buy? During the past year, I have watched as many ventured into this stock for a trade – only to get clobbered. The key factor in determining Valero’s profitability – and its stock price – is the refining profit margin, known as the “crack spread” in industry parlance. This is the difference between the cost of oil purchased by Valero and the price it can get for the distillates it obtains by refining the 3.1 million barrels of crude oil that it processes daily.

Recently, the overall industry crack spread has been narrowing. In fact, it has been for some time as governments around the world and gasoline companies actually try to hold down the pain motorists feel at the gas pumps.

The “perfect storm” that hit Valero this year had several catalysts:

• First, we watched as the price of crude oil soared exponentially, the result of rocketing global demand overseas and a lack of effort in both the United States and other countries to increase production.
• Second, demand for distillates in the United States waned as the U.S. economy slowed down and distillate prices soared trying to catch up with crude prices. This made it very difficult for the increases in the price of gasoline to be able to keep up with increases in the price of oil, compressing Valero’s crack spreads from last year.

That was the bad news.

The good news is that crack spreads in the second quarter have increased from the first quarter of this year. Also, since Valero’s refineries can process the cheaper “heavy sour” crude oil, the company has a sustainable competitive advantage over other refiners, giving its refineries staying power through rough times like these. For very-long-term holders, this is when you buy stocks such as this one; since the weaker rivals often disappear (the rivals either eventually get shut down, get sold off – or both), and the strong players emerge as the victors.

In the refinery sector, that strong player – and eventual victor – is Valero. But we are not there yet, and the lack of expansion in refining capacity in the U.S. market over the past decade has established a definite floor under crack spreads, meaning there’s only so low they can go.

The U.S. government expects crack spreads to improve moving forward, but those spreads remain well below where they were in last year’s second quarter. That’s good because it means there’s room for improvement – in both the margins and the share prices.

Another plus is that as oil prices have been dropping precipitously recently from the high of almost $150 per barrel, crack spreads have been increasing. And the drop in prices of natural gas, which is an input to Valero’s refining process, has also declined, further adding to margins.

The bullish argument, then, is this: The drop in oil prices, and sequentially expanding margins (from quarter to quarter, as opposed to year over year), will combine with the low valuation in Valero’s stock price (the current Price/Earnings Radio is 6.76, while the Forward P/E is 11.22) to boost the company’s share price, which appears to have bottomed of late.

This bullish case could very well be accurate; unfortunately, it’s still too difficult to call. And here’s why:

• The U.S. economy isn’t going into a recession. That means U.S. demand for petroleum products won’t abate as much as analysts expected, and may actually soon begin to escalate anew (even if it’s somewhat reduced because of energy-reduction initiatives).
• Emerging-market demand will continue to escalate as incomes rise and more consumers buy cars. The respite there also is likely to be a temporary manifestation: They have curbed gasoline demand subsidies because of the inflationary impact of high crude prices and food prices; as crude prices are abating, demand is likely to reaccelerate.
• Evidence about the resilience of emerging markets has been abundant of late. There was Cisco System Inc. (CSCO), which reported stronger-than-expected sales and profits last week, thanks largely to strong performance in Mexico, Russia and Asia – and especially China. There was the comment by Jeffrey R. Immelt, chief executive officer for industrial giant General Electric Co. (GE), who talked of the undiminished strength in the emerging markets – with a specific reference to the Asian infrastructure boom. And there’s the launch of the $2,500 car – the Nano – in India by Tata Motors Ltd. (TTM), a domestic carmaker with global aspirations.

It’s worth noting, too, that most of these markets outside the United States, which are currently slowing, have plenty of room to cut interest rates. And some will be able to do so, should the prices of commodities and other goods continue to decline.

Unfortunately for our evaluation of Valero, in addition to the ongoing gyrations in oil prices there’s substantial uncertainty being created in Washington, largely because of the ongoing political battle that’s focused on the lifting of the ban on drilling in offshore U.S. waters. The mere possibility of this ban being lifted has added much downside pressure to oil prices by motivating profit-taking by the speculators who had previously been betting that long-term prices were destined to head higher.

Hence, while Valero’s beaten-down shares appear very appetizing right now, and while the shares seem well positioned for a near-term speculative trade, there’s still too much uncertainty to call this an actual “Buy” for investors. Unless we see much-lower oil prices, which would rekindle gasoline demand in the U.S. market and expand Valero’s margins, the upside, if any, in Valero’s stock will remain very limited. So I cannot recommend to buy Valero here. However, since Valero’s stock has come down dramatically, and the company still is profitable (they are still profitable, show mildly expanding sequential margins, and management is committed to support the stock with buybacks), neither do I see a compelling reason to call it “Sell” here. So I will stick with a tenuous “Hold” until we can at least start resolving the uncertainties surrounding oil prices and the U.S. economy.

Action to Take: HOLD Valero shares as we await a bit more certainty in both the oil sector and the U.S. economy.

[Editor’s Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with his newly created "Shadow Stock Trader" service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a brand-new Money Morning feature that so far has covered such companies as Cisco Systems Inc. (CS), ABB Ltd (ADR: ABB), Cummins Inc. (CMI), and Chevron Corp. (CVX). Next week, Marquez will write about Berkshire Hathaway Inc. (BRK.A, BRK.B), the investment vehicle run by famed investing guru Warren Buffett. ]

(*) It was once the “$64,000 question,” but inflation has done its work all too well.

Source: Buy, Sell or Hold: Valero Energy Corp.

Oil prices fell below $122 a barrel “on expectations that the surge in energy prices is depressing U.S. gasoline demand”. What the oil bulls don’t tell you, of course, is that a bubble asset like oil is most popular when it goes up and produces risk-free gains. An asset that drops $30 in 2 weeks is not risk-free. Hence, it seems less attractive. Investors get gold feet. If they don’t bail… they may well stop putting more money at risk.

We had started to predict a drop in oil prices several weeks ago. In fact, the invitation to join our new premium service Hot Stock Confidential was based on the analysis of money flows, as hedgefunds and industry insiders began to divert large streams of cash into U.S. refinery stocks.

Accordingly, refiners Valero (VLO) — up 3-plus %, Sunoco (SUN) — up 7-plus %, Holly (HCO) — up 5-plus %, are all in the green. If predictions of OPEC’s president come to pass, we could see oil back at $70.

Our own speculation on falling oil prices involves a U.S. refiner that not only has been artificially depressed by mishaps earlier this year… but has just added dramatically to its overall capacity.

Some analysts still predict that oil could trade at $175—or even $225—by December. But insiders and hedge funds are betting serious money on falling prices.

Source: Crude Oil at $122 Is Good News for Refiners Valero, Sunoco, Holly

The rally in both metals ended at 7:00 a.m. NY time when the usual not-for-profit sellers showed up. And just like Friday, the bottom was in at the London p.m. fix…which is 3 p.m. in London…10:00 a.m. in New York. Then both metals rallied sharply until 11:20, sold off, and then rallied into the Globex close at 5:15 p.m. New York time. Both gold and silver finished on their ‘highs’ of the day…such as they were. But having said that, Monday was options expiry and to see price action like this was rather amazing, and certainly not what I was expecting.

Here’s the Kitco gold chart for Friday and Monday’s trading. The lows at the London p.m. fix stick out like the proverbial sore thumb.

click to enlarge

On gold’s wild ride on Friday, the o.i. dropped 970 contracts. However, silver had a much bigger drop in o.i. on Friday…down 2,771 contracts. That drop goes along with Thursday’s decline in silver o.i., which was 1,256 contracts….a number I wasn’t able to track down for my Saturday a.m. commentary.

As I mentioned a few lines ago, yesterday was options expiry…and the bullion banks/’8 or less’ traders are still short massive amounts of both gold and silver. They only covered a very small fraction of their short positions in both metals this time around. They weren’t even able to (or didn’t want to) take out gold’s 50-day moving average…and they couldn’t (or didn’t want to) get either metal below their last Friday’s lows. A sign of weakness…or are they just keeping their powder dry for the ‘August Low’? Options expiry in August is the 28th. First day notice for delivery into the August gold contract is Friday, July 31st.

The day after options expiry in July, gold and and silver both had big rallies. Will history repeat…or will we have to wait until next week when first day notice has past? We’ll find out soon enough.

The usual NY commentator had the following to say about gold’s activity on Friday and Monday…”Friday’s $17+ range and up $4.50 Comex (AMEX:IAU) floor close saw open interest slip only 970 contracts (3.02 tonnes). Fresh sellers and long liquidation were accommodated by fresh buying, it seems. Several commentaries note that last week’s CFTC data indicated that gold was virtually the only commodity which did not experience significant net liquidation.

“Today’s (Monday’s) familiar morning sell-off and recovery to close up 90c was dismissed by some as a quiet day. Yet estimated volume was 230,870 lots with a switch effect of 31,712: any day with 200,000 contracts trading outright is only quiet in the sense of suppressed.”

Today is cut-off for Friday’s Commitment of Traders report. I’m hopeful that all of gold and silver’s wild ride into options expiry will be in it. We shall see.

On Friday afternoon, I had my regular weekly radio interview with my good friend Al Korelin, of Korelin Economics. If you’re interested, the link is here.

The news on Monday, and over the weekend, was beyond belief…The IMF sees no end to the credit crisis…the FDIC closed two more banks…First National Bank of Nevada and California-based First Heritage Bank. There will be hundreds, if not thousands more, before this financial and monetary debacle is over. I see that Valero Energy (NYSE:VLO) in Texas was informed that Mexico would be cutting crude deliveries to their refinery by 15%. Reason? Mexico’s oil production is in precipitous decline. Talking about oil…in a Financial Times story out of London…the move to put curbs on energy speculators was blocked by Republican legislators on Friday. The groups that were opposed to this legislation were…the Chicago Mercantile Exchange, the ICE, the NYMEX and the New York Energy Exchange. No surprises there.

The first story of the day is from the United Kingdom. In a move that probably made Paulson, Bernanke and the Fed swell with pride, the Chancellor of the Exchequer, Alistar Darling, has come out with a plan to rescue that country’s mortgage industry. The story is from The Telegraph in London and is entitled “Treasury plan to rescue mortgage lenders”. If this sounds like a carbon copy of what the U.S. just did for Fannie (NYSE:FNM) and Freddie (NYSE:FRE), it’s pretty close. The link is here.

In another story that has garnered almost no headlines…like every other news item I’ve mentioned in my column today…here is a story of a short seller on the wrong side of a crude oil trade. I mentioned the company last week…Semgroup…that went under because of a $3 billion loss in the crude oil market. This is a GATA dispatch of a Ted Butler essay, with a preamble by GATA’s secretary treasurer, Chris Powell. The comparison to that situation…and the short situation in silver and gold…is disturbing to say the least. I urge you to read this very carefully. The essay is entitled “Coincidence or Confirmation”. The link is here.

Anyone who thinks the banking sector is out of the woods is as stupid as a fence post, as corrupt as a Wall Street bond dealer, or as asleep as Rip Van Winkle. – Dr. Jim Willie, 24 July 2008 – goldenjackass.com

Reality caught up with Wall Street again yesterday. Will the boyz allow two big down days in a row? It’s not normally part of their SOP, but it has happened before. As I said in my radio interview with Al Korelin…”What we are looking at is an economic, financial and monetary hallucination.”…and if the ‘powers that be’ hadn’t been blowing asset bubbles left, right, and center, this market would have crashed more than a decade ago…and we wouldn’t be staring Armageddon between the eyes as we are right this very minute.

I hope your Tuesday goes well, and I’ll see you here tomorrow morning.

Source: And Then There’s This…Tuesday, July 29th, 2008

What we can say is that oil is still sky high at $139 a barrel.

Shock Market Trader editor Mike Burnick says there could be a painful correction around the corner. If there is, there’s one sub-sector of the energy industry that would actually benefit big time from such an oil correction: refiners…

Since 2001, the price of a barrel of oil has risen more than 600% to a recent high of US$145. The price of unleaded gasoline however has jumped “only” 300% or so over the same time frame to a recent price of US$4 per gallon.

Stuck Between High Taxes and Refining Costs

That math just doesn’t add up if you’re in the refining business. Not surprisingly, the price of oil is the biggest factor that determines the price of gas. In fact, crude oil accounts for 75% of the total cost of gasoline. The other next two biggest factors (at about 10% each) are taxes, and refining expenses.

There’s no way to avoid the taxes. One of the Presidential candidates proposed temporarily suspending Federal taxes on gas recently. But then someone pointed out that nobody would fix the potholes or widen the lanes on the interstate highway system if they stopped collecting gas taxes. That comment effectively silenced the idea.

So with taxes pretty much a “fixed cost” and crude prices escalating, the companies that refine oil into unleaded gasoline and diesel have been caught in a squeeze play. And it has decimated their profit margins.

In fact, profits at U.S. refinery operators plunged 98% in the first quarter because they were caught behind-the-curve on skyrocketing oil prices. Refiners have been raising prices to be sure. But they just haven’t been able to hike prices for gasoline, heating oil, and jet fuel fast enough to keep up.

To Know When Refiners Are a BUY Again…Keep an Eye on the Crack Spread

As a result, refinery stocks in the S&P index have been clobbered. These stocks have sunk 40% even as oil prices set new record highs. But the key to refinery profits is what’s called the crack spread.

The crack spread is the theoretical profit margin a refiner should earn from processing three barrels of crude into two barrels of refined gasoline and one of heating oil. That spread has plunged 38% over the past year. And it’s taken industry profits down the drain along with it.

But crack spreads, like so many relative price relationships in financial markets, are constantly shifting from peak to valley and back again. Last year the crack spread for refiners was almost US$23, today it’s just under US$14 — a big shift.

As you can imagine, this huge shift has come from crude oil’s unusually strong advance. Falling crude prices however can actually be a boon to refiners. “You really want to own refiners when oil’s going down, and not straight up,” according to Cambridge Energy Research.

But now energy sector fortunes may be reversing. At least that’s what smart-money investors, including industry insiders and hedge fund mangers, are saying.

In the last month alone, refining company executives have purchased US$2 million worth of their own shares, according to Bloomberg. That’s more insider refiners buying than at any time since 2000. In fact before March of this year, insiders had been very consistent net-sellers of refining stocks — “dumping more shares than they bought every week since 2003.

“Anyone right now buying the refiners would have to be banking on a pullback in oil prices,” according to one fund manager interviewed by Bloomberg.

A Lower-Risk Way to Make Money Off a Widening Crack

Buying the refinery sector right now just might be your best bet among the various energy sector plays, especially considering the “speculative” overbought state of crude oil futures at the moment.

Unfortunately, there’s no ETF I know of that gives you a broad based bet on the refining sector, at least not yet. Several leading refiners including Valero Energy (VLO) and Tesoro Corp (TSO) are among the stocks with big recent insider buys, according to Bloomberg.

This should even make a good “pairs-trade” strategy for you. Typically a pairs-trade involves going long one stock or ETF — in this case a refiner. Meanwhile, you would sell-short another major, integrated oil firm like say, Exxon Mobil (XOM) at the same time.

But here’s a pairs-trade twist that goes long-long — perfect for retirement accounts.

Buy the ProShares UltraShort Oil & Gas (DUG), which is designed to go up in price as the overall energy sector declines. At the same time, buy your favorite refiner, and earn potential gains as the razor thin crack spread widens again.

Source: What to Buy Before the Oil Bubble Busts