How to Profit: Oil and Gas Crack Spread

Oil and Gas Crack Spread: How to Profit from an unrealistic Spread.

Spread out of whack: Natural Gas Crack Spread

When you hear oil and gas futures traders talking about the crack spread what they really mean is the difference between the price of crude oil and petroleum products extracted from it. The ‘Crack’ can be though of as cracking raw oil into the various components that it will become when processed: gasoline, kerosene, diesel, heating oil, jet fuel, asphalt, etc.

Normally, futures traders will focus on the crack spread for gasoline and heating oil. During the winter the focus tends to be on the heating oil crack spread while the remainder of the years the focus tends to be on the gasoline crack spread.

Large Oil refiners and oil and gas companies may trade crack spreads to hedge price risks for the products that they offer while speculators will try and predict where the market is heading and profit from the change in oil vs gas/heating old differentials.

Speculating on the various crack spreads is for more sophisticated investors; however, it does not need to be a difficult thing. Many of the large commodities exchanges have simplified the trades needed to perform such strategies. The NYMEX for example offers virtual crack spread futures by combining a basket of underlying futures contracts that correspond to the various oil production outputs. With the basket futures you only need a single transaction to organize a trade as opposed to buying and selling a full basket of futures yourself to participate.

So what should I be looking for to make money?

When crude oil rises:

If other products appear to be flat or more up in price to a lessor degree then the crack spread will be diverging. These spreads tend to remain within a range that could be correspondent to actual costs associated with their production. A large jump in oil prices without a corresponding large jump in gasoline prices for example, throws the spread outside the comfort zone. As a speculator you are look to spot that divergence and profit from it.

How to profit: When there is a divergence as above, to profit you would shot sell the crude futures contract and buy the gasoline or heating oil futures contract with the same expiry to keep things simple.

When the price of oil falls and the crack spread narrows:

Under this scenario you would just do the opposite: sell the crude oil futures contract and buy the gasoline or heating oil futures contract. Again, keep things simply and just use the same expiry dates.

The Basic Rule of Thumb: Sell the overpriced product and Buy the under priced product.

If you do not understand futures they you can also perform these trades using options

Google Earth Investment Application:

Investment Opportunities in Canada

To Income Trust or not to Income Trust: Looking for Capital Gains from Income Trusts and a Steady Income Stream.

If you have been invested in the market recently then you have experience the major shock waves of highs and lows. Everyone is looking for the next big growth story, but what about a nice Capital Gain coupled with a steady flow of income?

Income Trusts have seen better days. Everyone has had their hate on this instrument and it is reflected in market prices. The first blow was the Conservative Governments change to the tax consequences of owning Income Trusts and the pain did not stop there. There has been a negative sentiment about these assets every since and again we are seeing 56 week lows. I also experienced this pain, but these are growing pains and you can’t make the next milestone without stretching.

This sound’s like opportunity knocking at the door: who doesn’t want to buy a nice steady income stream on the cheap? All those disgruntled investors that lost as a result of the new tax implications that is who.

But how long can this negative sentiment last?

It will last until you see a small group enjoy the great returns that Income Trust produce when purchased at the right time and it is too late to enjoy the full benefits of being an early wagon hopper. The right time may be now or it may be in the future; however, I’m betting on a near term appreciation and love the fact that I can by a high yielding trust for cheap.

If your interested in Income Trusts you need to do the proper research to find one or a few that are right for your portfolio. The best thing to do is to consult with a professional investment advisor who can help you make the right decisions.

Here is a list of Income Trusts that I am currently following and discussing with my investment advisor:

Bonnett’s Energy Services Trust (BT.UN: TSX)

Canfof Pulp Income Fund (CFX.UN: TSX)

Deepwell Energy Services Trust: (DWL.UN: TSX)

Enerflex Systems Income Fund (EFX.UN: TSX)

Enervest Diversified Income Trust: (EIT.UN: TSX)

Progress Energy Trust (PGX.UN: TSX)

Sentry Select Diversified Income Trust: (SDT.UN: TSX)

Strategic Energy Fund: (SEF.UN: TSX)

Stoneham Drilling Trust (SDG.UN: TSX)

Trinidad Energy Services Income Trust (TDG.UN: TSX)

Wajax Income Fund (WJX.UN: TSX)

Canadian Dollar: How to make money on the increasing value of the Canadian Dollar.

The Canadian Dollar hit a 130 year high on November 7, 2007 at $1.1027 (U. S.). This new valuation of the dollar will take some getting used to. Already there have been some business outcries for the Bank of Canada to step in and lower rates to cool off the appreciating dollar. This I do not believe to be the proper course nor do I think the economic situation to be so dire.

There are a number of reasons why the Bank of Canada should not step in.

First, lowing interest rates will only cause inflation throughout the Canadian Economy. The primary responsibility of the Bank of Canada is to keep inflation reasonable stable between 1-3% a year. Currently we are sitting at 2.5% and that is exactly where we should be.

Second, suggesting that a higher Canadian dollar will cause massive job cuts is ridiculous. The unemployment rate is near record lows; talk a walk down the street in Vancouver or Calgary and you will find it impossible not to be inundated by all the help wanted ads. These jobs won’t completely dry up just because our goods have become more expensive for Americans.

Third, all the banter about cutting rates is coming from the manufacturing sector. It has been displayed overtime that situations such as a higher dollar only leads to efficiency. Either become more cost efficient at producing or you shouldn’t be producing at all. This is the type of situation that yields major innovations.

Fourth, the U.S. Dollar is depreciating relative to all major currencies. The world has become a much more global atmosphere than we have seen in the past and as a result markets are able to react much more efficiently. As a result, by lowering interest rates the Canadian Economy will not keep pace with the other major currencies.

Fifth, there is a global power shift going on. The U.S. has been the dominant economy for many decades and that is changing as economies like China, India, and even the European Union as a trading block fight to become the new dominant trading powers. While this competition occurs, Canadian exports will shift from the U.S. to these other areas.

Sixth, Canada is resource rich and Uncle Sam is hooked. Canada dominates the commodities market because it is the safest source of oil, gas, metals, energy, etc. The world sets the prices for these commodities so the United States will keep coming back to Canada to buy these inputs as the price will not be affected by a higher dollar.

How to Make Money with the Soaring Canadian Dollar:

There are a number of ways to do this and I will describe a few:

1) Simply buy in to the Canadian Economy. The simplest way and safest way to do this would be to purchase some high grade Canadian Government or Corporate Bonds. These will yield a respectable percentage, most likely between 4 and 7 percent and at the same time you may also extent your return through a tax free currency appreciation.

2) Buy the TSX index. This way you are diversified and can reap the benefits of an expanding Canadian economy. The TSX has averaged over 10% annually over the past number of decades.

3) Buy the Canadian Banks: the Banks have outperformed the market significantly over the past decade. There are a lot of smart people working at the banks and they always seem to find better investment opportunities than even a sophisticated individual. Take the old adage 2 heads are better than one and augment it to 1000 heads are better than one.

4) Buy Commodity Stocks: don’t sit on the sidelines. If commodities are hot like they are and there is a global infrastructure boom going on and increasing buy, buy, buy. Lot for the next big commodity. Currently my favorites are uranium and natural gas as both should see boom times again soon.

5) Buy Companies that service Commodity Companies: These companies experience a boom at the same time as there are more new projects to service.

6) Be a Manufacturing Vulture: look for large quality manufacturing companies that the market

has hammered as a result of the higher Canadian dollar. This is when these companies are innovative and develop better efficiencies. When they become more efficient they become more profitable and huge gains can be made.

Here is a Google Earth link to some Canadian Companies my Investment Advisor has recommended for me.
Investment Opportunities in Canada

Before making any investment decisions you should always consult with a professional to see whether the investments would be a good match for your risk preferences and overall portfolio.