Refiners are in play Monday. Will they be the next group to leg up in the rally?
One stock seeing heavy option volume on Monday is Phillips 66. The biggest trade of the day was the purchase of 5,000 November 80 calls for $1.95, with the stock at $66.33. This is a bullish bet that the stock will be above $81.95 at November expiration (a 24 percent move higher).
This bullishness comes on the heels of a recent announcement by the company that it will boost shipments of cheap domestic crude oil to its refineries across the country by as much as 130,000 barrels per day. To accomplish this, Phillips has joined forces with Enbridge Energy Partners for rail shipments of Bakken crude to its East and West Coast refineries. Shipments are expected to reach 35,000 to 40,000 barrels per day by the fourth quarter.
Recently the refiners have sold off, as the spread between the West Texas Intermediate crude oil traded in the U.S., and Brent crude oil traded in London, has narrowed along with the crack spread (which compares the price of gasoline to the price of crude oil, and thus tells us roughly how much can be made by refining, or "cracking" crude oil).
However, as more capacity to transport and produce U.S. crude comes online, the WTI—Brent spread should widen back out, which gives refiners like Phillips 66 a leg up on the global competition.
The export market is one of the biggest opportunities for growth among U.S. refiners. The U.S. is currently undergoing a major shift from a large energy importer to an exporter, especially of refined products.
Right now, Mexico is America's largest export market for refined products, because U.S. refineries are more capable of refining "heavy sour" Mexican crude, which is of a lower quality than the "light sweet" crude oil that is used for the WTI benchmark.
I like the refiners at these levels, and am willing to buy calls on them to participate on the upside, but reduce my downside risk in this volatile sector. On Monday morning, we entered into a long position in Marathon Petroleum, which is our top pick in the sector.
We expect Marathon to do well for all the reasons Phillips is set to gain, but Marathon's advantage is that the company already has 8,300 miles of pipelines, which allows its seven refiners, with 1.69 million barrels per day of capacity, to have access to cheap Canadian and Bakken crude oil.
On the technical side, Marathon has had a key reversal from a bearish downtrend over the past week, and should it break above $86 it could be poised to reach new highs.