Here at Money Morning over the past six months,
we’ve talked a great deal about oil and gasoline prices. We’ve offered our
predictions about how high those prices were going, and have detailed a number of
investment opportunities - chosen as much for their margins of safety as for
their profit potential.
This time we’re going to detail three energy stocks with the potential for
double-digit - or even triple-digit - profit gains. Admittedly, these are
longer-shot, speculative plays. But we used a special energy indicator to help
ferret out these energy plays.
This indicator is known as the “crack
spread.”
In case you’ve never heard the term before, the crack spread is the
difference between the price of crude oil and the value of the petroleum
products that refiners can make from it. The crack spread can widen or narrow
over time, depending upon various combinations of supply and demand.
If the spread is positive, that means the price of the products that result
from the refining process - gasoline, diesel fuel, aviation fuel, heating oil,
kerosene and asphalt, to name a few - is greater than the cost of the crude oil
needed to make them. But if the spread is negative, it suggests that the cost of
crude is higher than the end-game value of its derivatives.
Right now, the crack spread is narrowing. In fact, it has been for some time
as governments around the world and gasoline companies actually try to hold down
the pain motorists feel at the pump.
Granted, governments and major oil players make for strange bedfellows. But
they have a common interest right now: Both are trying to prevent “demand
destruction,” the plunge in oil demand that would result if millions of
motorists - fed up with high oil and gasoline prices - just stopped driving.
Governments want to prevent an economic collapse, while the integrated oil
companies simply want to avoid being branded as the “bad boys” of the
soaring-oil-price era - making it much easier for the incoming presidential
administration to slap the entire sector with an “excess-profits tax” (something
that’s already being discussed by Washington insiders).
But we can also see another scenario, one that’s very different. Peering into
our crystal ball, we can see a situation in which the crack spread begins to
widen, and gasoline prices run away anyway - eventually reaching $7 or even $9 a gallon.
For motorists, the pain would be excruciating.
