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Although that statement may sound totally backward and counterintuitive, I'm going to show you why it's true and try to give you a strategy for oil exposure -- if you must have one. Over the last several sessions, the oil markets have come down precipitously, falling more than 10% since seeing an interim high over $99 on Nov. 26. Conventional wisdom has held that oil stocks walk in lock step with the price of oil -- if oil goes up, so do ExxonMobil (XOM - commentary - Cramer's Take) and BP (BP - commentary - Cramer's Take) and ConocoPhillips (COP - commentary - Cramer's Take). Profit margins have to increase when the price of a barrel of oil increases, right? While this has been the case for most of the run-up in oil prices over the last three years, I submit that the game is changing now, and we need to recognize those changes to stay ahead of the oil game and keep our portfolios on track.
Here is a chart of the U.S. Oil Fund (USO - commentary - Cramer's Take) ETF over the last several months; directly underneath it is the Energy Select Sector SPDR (XLE - commentary - Cramer's Take) ETF.
Even the largest consolidated oil companies depend for a certain amount of their crude supplies upon foreign imports and are subject to the same increased costs as anyone else. As I outlined in a previous column, the prices for the refined products that oil companies rely on to really generate profits did not increase to the same degree that oil did on its march to $100. I still believe that this disconnect was due to the fact that the crude barrel is subject to enormous outside speculation, while the prices of refined products are reliant upon "regular" fundamental forces of supply and demand.
No matter the reasoning, as the price of a crude barrel has decreased, the margins on refined products -- the crack spreads -- have improved dramatically. That improvement will bring with it the enormous profitability the oil companies have enjoyed until very recently. You can see that graphically in this chart comparing the two benchmarks given above, the U.S. Oil Fund ETF and the Energy Sector SPDR.
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At the time of publication, Dicker was Petroleo Brasileiro and Sinopec, but positions can change at any time.Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982. Brokerage Partners
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