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This Energy Stock is a Hidden Opportunity

John Jagerson and Wade Hansen

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Crude oil prices have fallen from their multi-year high of $76.90 per barrel. Prices fell through October into early November, and the Energy Select Sector SPDR ETF (NYSEARCA:XLE) that tracks the S&P 500’s energy sector followed.

Oil exploration companies, such as Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX), usually suffer as crude oil prices drop. XOM and CVX also happen to be two of XLE’s biggest holdings.

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But there is another segment of this sector you might not be aware of …

Oil Refiners

Unlike oil exploration companies, oil refiners tend to benefit from falling crude oil prices. As crude prices fall, it becomes cheaper for refiners to buy oil. This means it’s cheaper for refiners to buy the material needed to make their finished product — gasoline.

But gasoline prices also fell through October, and that means refiners can’t sell their product for as high a price. It may seem counterintuitive, but this actually gives traders a good opportunity.

We see a big opportunity in the petroleum refiner Valero Energy Corporation (NYSE:VLO). We mentioned before that refiners like VLO benefit from lower crude oil prices, but the company was still hit during the October selloff, and the falling price of gasoline didn’t help either.

Lower gasoline prices kept the company’s margins from expanding like they would have if only oil prices had dropped.

Looking at the daily chart of VLO, you can see that the stock has popped up off support in the aftermath of the company’s earnings announcement on Oct. 25. This is a good sign the stock is regaining some stability.

The stock also appears to have hit resistance just below $95 and is now consolidating. We anticipate that the stock will continue to consolidate in this range for the next few weeks.

Something similar happened last February, and after reaching a bottom, VLO rallied through April. With the strong earnings report, we wouldn’t be surprised to see VLO rally again.

However, it may take a while for that bullish move to develop. In the meantime, we’re long VLO and have just recently sold some call premium against the stock to generate some extra bonus income.

To get all the details and see exactly how we are trading this situation with options — and to get access to our full portfolio of promising trades — consider signing up for risk-free trial subscription to Strategic Trader today. 

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.

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