Profit From High Gasoline Prices

Because the high price of gasoline has been making the news so often over the past few weeks, an oil trader's perspective could be quite valuable. To get that, you'll need a short education in the role of the refiner.

Simply put, you'll have to know how the system works, how the commercial players are gaming the market, how the public is getting gamed and how you can at least try to make some money off the whole deal, as opposed to being a victim of it.

Fortunately, Dano's here to the rescue.

The Basics of the Business

First, realize that crude oil has absolutely no value on the retail market. It can't be burned for fuel, and it has no other commercial use. Only after crude oil is refined into retail products does a barrel of crude have any value at all.

Most modern refineries are set up to release gasoline and heating oil as their two main products. The process of converting crude oil into these products is known as "cracking." The general convention is that three barrels of crude oil will "crack" into two units of gasoline and one unit of heating oil. Remember, this is only a convention. Refineries are all a little different in the absolute ratios they produce, and when crude is refined, it also gives off many other petroleum by-products.

Using this convention, however, is convenient for refiners that are looking to hedge their forward price risk. They can buy 3 units of crude oil (CL) and sell 2 units of unleaded gasoline (HU) and 1 unit of heating oil (HO). Cracks were quoted in this 3:2:1 ratio for a long time, but the convention has been practically abandoned these days. Now, everyone quotes cracks using one unit of crude to one unit of a product, whether gasoline or heating oil.

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At the time of publication, Dicker had no positions in the stocks mentioned, 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.