The Market Tells Me All I Need to Know

This is the mantra with which I will start my first entry for oilprice.com subscribers and will head everyone thereafter – it has been my guiding principle in my trading and has served me well.  Never be so smart that you can’t be swayed in your judgment by what the market is telling you. In the end, being right is nothing – making money is everything. 

So, what is the market telling me this week? 

There’s been a slackening in the WTI-Brent spread over the last 3 weeks of December, from over $25 premium to under $20, although in the last day or so we’ve seen a move just slightly over that round number again.  Now, we’ve seen moves back and forth in the WTI-Brent spread before, and to quote a monster commercial oil trading friend of mine “If I’m ever convinced to try and trade this spread again, promise to shoot me” – meaning that I’m not about to try to tell you precisely how more ‘normalized’ the spread might become or when it will make another run back to the highs.

All I will tell you is that the market in this spread is trending lower and has pressure on it, at least temporarily – and that will bias many of the trades I will look at over the next week and perhaps several, depending on where the spread goes from here.  Here are two of those trades:

First, a WTI/Brent spread with this kind of downwards pressure is going to put an UPWARDS bias on WTI futures, no matter what else is going on in the market.  I could talk analysis of the crude market for the coming year and quote just about every analyst on the street convinced that crude will have a very bad year and drop – one major investment bank analyst has called for $50 crude in 2013.  He could be right, I don’t know yet – but for now, I’m certainly no seller, in fact buying call spreads in small size on a simple risk/reward basis – and NOTHING fundamental.

Second, refinery stocks are in for a retracement.  I can claim to have first cited the WTI/Brent spread as the benchmark indicator for the margins and ultimately profitability of the refiners (particularly those located in the mid-continent) back in 2010 on CNBC – these days everyone uses it without attribution.  That’s ok, because it’s still working.  The day it stops correlating well is the day that everyone will walk away from the theory and call Dicker an idiot for coining it in the first place.   But what’s good for the goose should be equally all right for the gander – these stocks like Tesoro (TSO) Western (WNR) Valero (VLO) and Phillips 66 (PSX) have had outrageous runs based on this stubborn high-flying spread – they need a break.

I’m expecting one in the next weeks.

The Trader – DANO