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One of the best recipes for a bullish trade is when a stock has strong fundamentals, good value, a catalyst for growth and an underestimated future.
The last bit is tricky because it requires a mix of social understanding, philosophy and research to get right. But, when you have several underlying and relatively unknown bits of positive data on the verge of colliding in your favor, the odds of a positive price increase greatly increase.
When it comes to oil, there are many factors that influence price in the near term. Emotions, news, war (or the potential of it) and economic data can all jolt the price of black gold and create massive volatility. And even though supply and demand are what ultimately determine price, oil's fundamental factors are more cumbersome and complex than what you'll typically find for any stock. Therefore, oil's price actions tend to be more erratic and unrelated to the real underlying fundamentals.
So, rather than bet on the daily oscillations of oil and try comprehend the emotions driving it, there's another vehicle we can use to capitalize on these bits of positive data I see. The best part is that this stock is influenced more by objective facts rather than subjective opinion.
For today's target company, Valero Energy (NYSE: VLO) there are several key underlying facts that all should have a bullish effect on price, enough to send shares at least 5% higher by mid-summer.
Using my options strategy, we can turn that move into a 31% gain.
Valero Energy is an international manufacturer and marketer of transportation fuels and other petrochemical products based in San Antonio, Texas.
As an independent petroleum refiner and ethanol producer focused mainly in the U.S. and Canada, VLO employs approximately 10,000 people, and operates 15 petroleum refineries with a combined throughput capacity of approximately 3.1 million barrels per day and 11 ethanol plants with a combined production capacity of approximately 1.4 billion gallons per year.
OPEC and Oil Gluts
If you're not familiar, OPEC is group of 13 oil-producing countries that collude (in the most legal of ways) to help control oil prices (i.e. keep prices at levels where they can make the most money by selling the most product the market will bear). Love them or hate them, they do control more than 80% of the world's oil reserves. But their influence is becoming less powerful, as they only account for less than half of global oil production.
There's been a lot of whoop-dee-doo about OPEC's recent decision to cut oil output, and even non-OPEC members are supposedly getting in on the action to scare oil prices higher. Fortunately for us, these scare tactics are mostly baseless.
The deceptive headlines seem ominous, but the data reveal the truth. These "massive cuts" really only bring production down slightly from record levels and are only temporary.
Even excluding U.S. production, oil is still being pumped at near record amounts.
OPEC's "cuts" still leave production higher than it has been in all of history. OPEC sneakily boosted production leading up to the cut to make it look like they were really doing something drastic -- but it was all a shell game.
The tactics worked initially, sending oil up 31% from its November 2016 lows of $42.20 to a high of $55.24 in January, but prices have since come back down, and OPEC seems to be panicking.
Even though OPEC has already "slashed" production, prices aren't moving higher as planned. The failed plan to boost prices is causing infighting between members because some aren't cutting production as much as they promised.
Many of these countries depend on oil sales to keep their respective countries running. And if these oil ministers see that prices aren't rising, they will be inclined to sell as much as they can at current levels just to maintain the budget. Their actions are a "bearish tell" on oil prices.
By my estimates (and those from some very powerful firms, like Goldman Sachs), even the most dramatic OPEC antics aren't going to be enough to push oil prices much higher. In fact, a recent Goldman report predicted oil prices would be weak for the next three years!
Another problem for OPEC is that there are more producers in the market, like the United States, that have increased production with the modest price increases, adding to a glut of oil that's prevailed since mid-2014.
Storage overflows and even more U.S. producers coming back online are putting increasing pressure on oil prices.
With oil between $45-$55 (which is where Goldman Sachs expects it to stay), today's target is set to reap serious profit rewards.
Summer Driving with a Big Crack Spread
A mild winter, strong economy and moderate fuel prices should mean more Americans take to the streets for road trips. According to Bloomberg, the current environment could spur the busiest summer driving season in years. Excessive fuel consumption might help support oil prices, but it's especially beneficial to refiners like Valero, which is about 6.3% off its 2017 highs.
The EIA predicts strong total gasoline consumption in 2017 and record consumption into 2018, which will help keep Valero's future looking strong.
But there's a fact that many investors don't seem to be paying attention to... yet.
The "crack spread" is the difference between wholesale petroleum products, like gasoline, and crude oil prices. In simple terms, a bigger crack spread between crude and gasoline means bigger profit margins for refiners like Valero.
The above chart shows the crude/"Rbob gasoline" crack spread was only 16.6 when VLO was at its all-time high in January. The crack spread is now nearing 20.5 as we're about to enter the highest gasoline consumption season of the year. That means bigger margins and more sales for Valero.
At the very least, I see the summer driving season pushing shares of VLO back to recent highs of $70.
Since I'm bullish on VLO, I'm recommending my Profit Amplifier subscribers buy a simple call option that will deliver a 31% profit if VLO rallies to $70 by mid-June.
Now, I can't tell you the specifics of the trade here, since that wouldn't be fair to my Profit Amplifier subscribers who just got my trade alert. But I will tell you there is still time to get in. If you're interested in getting the VLO trade details while there's still time to get in, and learning more about how I select my option trades, go here.
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