The crack spread pays off again.
I’m no biblical scholar, but I have handily quoted one verse from the Old Testament since I was a pup. It’s the third chapter of Ecclesiastes: “To everything there is a season, and a time to every purpose under the heaven.” I can thank the Byrds for that, not Sunday school.
We financial types, especially those trading in commodities, deal with seasonality all the time. And not just for agricultural commodities. There are seasons in the energy market as well.
Imagine you’re an oil refiner. Your business is essentially a distilling operation in which you buy crude oil and sell finished products such as fuel oils and gasoline. Your distillation process, known as “cracking,” sometimes produces big margins and at other times profits are much thinner, or non-existent.
Fall and winter tend to be times when the “crack spread” tends to widen, when crude oil costs lag distillate prices. Aside from winter seasonality, refinery maintenance cycles and sustained product demand can also bolster the crack spread.
Recently, we reported that “buying” the crack spread in late October and holding the position—short crude oil and long for both heating oil and gasoline contracts—until late February can be a reliable money-maker for futures players. We set this out in a column published just before Halloween.
In that column, we also pointed out that you needn’t be a futures trader to take advantage of winter seasonality. A widening refining margin is often reflected in the stock prices of oil refiners as well. This is, in fact, 10 of the past 13 winters in which the share price of Valero Energy Corp. (NYSE: VLO) has climbed along with the crack spread. This year’s gain (Oct. 24 to Feb. 23), at 19.0 percent, was pretty average (the mean return over the past 13 seasons is 18.2 percent, with a range between 57.4 and -13.9 percent).
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