From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Commodities are off to another record year -- and it’s only April!
Crude oil and friends are leading the charge as the energy-heavy CRB Index is up 34% year to date.
Oil ripped above 100 in February and has been in a corrective phase since. The energy complex remains red-hot though, with natural gas futures breaking to fresh 13-year highs this week.
While crude oil finds its footing, its derivatives -- heating oil and gasoline, are coiling just beneath all-time highs and gearing up for some massive base breakouts.
We’re also seeing some bullish data points for the broader oil and gas industry as crack spreads are expanding and signaling a healthy demand for black gold. This bodes particularly well for oil refiners.
All of this price behavior is what we like to call rotation.
It's an essential characteristic of any real bull market, and it’s exactly what we’re seeing from commodities these days.
In fact, we’re even seeing constructive rotation within commodity subgroups, like the developments we just described in energy markets.
Let’s dive in and talk about some areas in energy that we think are ready to catch some of this rotation next.
Here’s a chart of the crack spread overlaid with the Oil Refiners ETF $CRAK:
There’s a strong positive correlation between the crack spread and oil refining stocks. This is because the spread is simply the theoretical margin these companies make from selling finished petroleum products.
It represents the difference between the purchase price of crude oil and the wholesale price of refined products like gasoline and distillates.
If the spread is widening, like it is today, it means refiners are becoming more profitable. That’s all we really need to know.
With the crack spread at its highest level since 2013, we’re anticipating oil refiners will soon follow and make fresh highs as well.
We haven’t seen it yet, but the CRAK ETF has been basing for almost 12-months now and looks ready to break out.
Here it is:
Once CRAK reclaims that shelf of former highs from 2019 and 2021 in the 30.50 to 31.50 range, the bias is higher and we want to be long with a target back at the all-time highs just north of 36.
With the strong rotational currents taking place in energy markets and commodities more broadly, this is a subgroup to keep a close eye on. We think this breakout materializes in the coming days and weeks.
With crack spreads making new highs, we think the next major move in the energy sector will be from oil refiners.
Be sure to check out our Trade of the Week section below for setups in some of the strongest names from this industry group.
Thanks for reading.
COT Heatmap Highlights
Soybean Meal: Commercials are beginning to unwind their net-short positioning by reducing their exposure by almost 6,000 contracts.
Orange Juice: Commercial hedgers continue to hold their largest short position in three years, adding another 862 contracts this week.
Japanese Yen: Commercials added another 2,800 contracts to an already extended long position.
Crude Oil: Commercial hedgers are roughly 10% away from their largest long position in three years.
