Breakout

Why Crude Oil Prices Spiked & How to Profit From it

Jeff Macke
Breakout

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We're seeing some relief in the price of crude oil today after yesterday's spike above $102 a barrel on news that Enbridge Energy Partners (EEP) had purchased Conoco Phillips' (COP) 50% stake in the Seaway oil pipeline. Enbridge's intention of reversing the pipeline flow to send more crude to Gulf refiners is what sent prices of West Texas Intermediate crude soaring. In the attached video TradeMonster.com co-founder Jon Najarian discusses the implications of Enbridge's move, spiking crude prices, and the implications for Americans.

Oh yeah, we also discussed ways to trade a move higher in crude products.

While the Enbridge acquisition is new, WTI crude oil has been moving higher for a month. The U.S. pricing benchmark has ramped from about $75 to above $100 a barrel in just the last month. The rise closed the spread between WTI and Brent crude oil from nearly $30 to under $9. Brent remained relatively flat over that time period and should offer slight relief to those concerned about prices at the pump, given that the international oil benchmark is more highly correlated to our gasoline prices. But only slightly.

"Emerging market demand, especially for diesel, is at record highs," Najarian notes. "We're not going to see lower prices unless we put a lot more supply on the market."

Enbridge switching the flow of the Seaway pipeline isn't going to be sufficient to change that trend, according to Najarian. "Domestic production here is 20% under where it was 10 years ago," he says. "If we ramped back up to that, which we could do, it would create a whole bunch of jobs. It doesn't have to be crude oil, it could be natural gas."

Ahhh... natural gas, the clean burning fuel alternative that's been the "next big thing" for generations.

Najarian is playing rising crude a via coal and E&P plays.

Investing in Coal Stocks

Najarian thinks coal is going to work higher. As a result he likes Peabody Energy (BTU), Alpha Natural Resources (ANR), and CONSOL Energy (CNX). He's playing via a long-dated call spread. The positioning means he's bought call options at one price and sold calls at a higher price; a relatively conservative position depending on the time-frame and size of the range.

Oil Exploration & Production Stocks

Another way Dr J is looking to play is in both shallow and deep water drillers. He'd avoid Transocean (RIG), but has Hercules (HERO), Diamond Offshore (DO), Noble Corp. (NE), and McDermott (MDR) on his wishlist, should they move slower.

Not shockingly the move higher in crude is going to be rough for sectors like the airlines, cruiselines, and truckers. Not to mention society as a whole. All the more reason to try to make money to help absorb some of the pain.

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