Editor's Note: Today, we welcome Eric Bolling to TheStreet.com. A top Wall Street trader and an on-air television personality for the Fox Business Network, Bolling specializes in commodities, technology, resource trades and ETFs. He will provide regular picks in a column for TheStreet.com.
Today, I'm turning my attention toward refiners. I have traded oil for 22 years so it makes sense that I start here.
The oil patch is ripe with a few great plays, and I will lay them out for you and the rationale for the picks in the column, the first in a series of regular features I will be writing for
Oil hit a record $119.93 before falling $9 by last Thursday. Then it bounced almost $4 on Friday. I have been a long-term commodity bull and remain so. However, with many of my favorite commodities in a corrective mode, I think the crude oil market is due for a sizable pullback.
Much of the hype around the commodity run has been credited to the weak U.S. dollar. I agree that a weak dollar adds to physical commodity prices, but the dollar has been retreating for a long time. Only in the last 18 to 24 months has the commodity play really rocked.
The oil picture is more about money flows than dollar pricing. The hedge fund community has a bankroll of about $3 trillion to $3.5 trillion. I suspect hedge fund traders will be sticking with trades that are doing well and moving dollars in unsuccessful positions to ones that are working.
Those in the real estate/homebuilder sector will move their liquidity to crude oil. We all know how the real estate-homebuilder trade has fared in this housing recession, but for those who don't,
, etc., are trading just pennies on their 2006 dollar values.
Furthermore, with a slowing economy, some retail stocks and auto stock money recently "benched" has likely found its way to oil as well. Lastly, it's important to remember the brutal drubbing that financial companies have taken in the last 12 months (think
, trading 50% off its 52 week highs).
The landscape is changing, though. The 325-basis points in rate cuts over the last seven
meetings are beginning to show results. And the liquidity functions have eased the nasty credit crisis we were in that weekend a few months ago when
went for a song.
The beneficiaries are many. The financial sector should soon become investor-worthy again. This just may give traders a much needed shot of adrenaline. That, in turn, may give the Fed the green light to end its easing cycle. That may then signal to the dollar traders that it is clear to strengthen further against the European currencies.
All this analysis is key to understanding today's plays:
Refiners have lagged the energy sector over the last six months and for good reason. The high price they are paying for oil was being met with lower demand for their products on the other side of their refineries. The squeeze was on.
Last summer, the gasoline crack spread (the gross margin on a barrel of oil refined into gasoline) hit $36. Last month, that same margin went negative. It now sits around $8/bbl.
I believe those margins are about to firm. Oil has shown signs of weakness. Equities are positive for the first time this year and within 10% to 11% of last year's record highs. That means money should begin to flow out of crude oil and into financials, tech stocks and others who have been neglected during the Fed easing cycle.
The barrel will lighten in price. This is margin for the refiner. And the summer driving season kicks off in just a few weeks. Margins are coming to a refiner near you!
I have always loved Chevron. It's true that the company is an integrated oil company, not just a refiner, but Chevron has several refineries on the West Coast. They run crude into a very high-priced California gasoline market, where the price for gasoline typically runs 30 cents to 50 cents per gallon higher than elsewhere east of the Mississippi. Chevron makes the added margin when the pump prices strengthen.
I also like Tesoro. Early last year, I owned Tesoro on the basis of valuation and the fact that it is also a refiner of jet fuel. Jet fuel has remained in high demand in spite of the airlines' well-documented problems. I am feeling the refiners are ready to turn to the upside again. Tesoro is sitting just a dollar and change off its 52-week low, and its price-to-earnings (P/E) ratio of 6 is the lowest in the group mentioned above.
At time of publication, Bolling was long CVX and TSO, although holdings can change at any time.
Eric Bolling is a host on the new Fox Business Network. Bolling was one of the developers and original panelists (nicknamed "The Admiral") on CNBC's "Fast Money."
Bolling is an active trader specializing in the primary investment tools available to Wall Street including equities, options, derivatives and ETFs.
Bolling is a member of several exchanges including The New York Mercantile Exchange (NMX), The Intercontinental Exchange (ICE) and The Commodity Exchange of New York.
After spending 5 years on the Board of Directors at the NYMEX, he became a strategic adviser to that Board of Directors where he assisted in bringing the company (NMX) public. He has been included in Trader Monthly Top 100 in 2005 and 2006. Bolling was the recipient of the Maybach Man of the Year Award in 2007 for his contribution of philanthropy and willingness to de-mystify investing to Main Street.
Bolling graduated from Rollins College in Winter Park, Florida and was awarded a fellowship to Duke University. Bolling was an accomplished baseball player. He was drafted by the Pittsburgh Pirates where he played before his career was cut short due to injuries. He honors his baseball past by sporting the NYMEX trader badge, R.B.I.