The Dual Signals Indicating a Buy in Oil
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Insight from the Editor: After experiencing numerous fluctuations in the oil markets and geopolitical instabilities, I've learned an essential lesson: periods of uncertainty in energy prices present opportunities for savvy investors.
It's all about taking a strategic approach rather than reacting in fear.
This article looks at signals currently emanating from the oil market that could indicate an advantageous entry point for investors. My colleague Jonathan Rose will provide valuable analysis on these signals and how they may foretell potential gains in both oil and refinery stocks.
The intricate dynamics of these markets will be the focus during The Convergence Summit on May 28 at 8 p.m. Eastern where Jonathan and my associate, Marc Chaikin, will discuss a new system for tracking money flow, enabling investors to gauge market shifts ahead of the broader landscape.
Let’s hear from Jonathan now…
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Reflecting back on October 1973, we witnessed a pivotal moment that exposed the fragility of the international oil market.
The crisis was ignited by a coalition of Arab states launching an attack on Israel, prompting a U.S. response that included military support. OPEC swiftly retaliated with an oil embargo against the United States.
The impact was swift and shocking: oil prices surged from $2.90 to $11.65 a barrel in a mere three months, while consumers faced a sudden 36% spike in prices at the gas pump. Long queues of cars at gas stations became the norm as rationing took hold.
Credit: JudiLen
During that tense period, the U.S. government responded by enforcing a nationwide speed limit and begging citizens to conserve fuel as an act of patriotism.
Though the immediate crisis subsided, the Iranian Revolution later in the decade ignited yet another wave of price hikes, with oil soaring to $35 per barrel by 1981—a staggering increase compared to pre-embargo levels.
These historical events illuminated not just the world's reliance on oil but also how rapidly the system could fracture amidst geopolitical upheaval.
Fast forward fifty years, and we're finding ourselves in a similar pattern of instability.
However, this time, the fractures appear to be much more significant.
By the end of this article, I'm providing actionable insights rather than mere prognostications.
Let's explore how I analyze an oil market under pressure — examining two critical indicators that are guiding my decisions, and how they've already led to profitable trades this year.
Understanding these signals can fundamentally shift your investment perspective on oil and guide you to profitable decisions before they are widely recognized.
A Potential Crisis that Could Exceed 1973
This year, tensions between the U.S. and Iran escalated dramatically, leading to heightened restrictions around the Strait of Hormuz, a vital conduit for approximately 20% of the global oil supply.
The oil market reacted, sending West Texas Intermediate crude skyrocketing from $66 to over $100, while Brent crude climbed from $71 to $119 in just three months.
The most significant aspect wasn’t merely the price surge—it was the internal upheaval within OPEC. The United Arab Emirates, one of the world's leading oil producers, announced its exit from the organization.
Such a departure is far from trivial, as it represents a fracture in a system that has structured global oil supply for nearly seven decades.
The timing couldn’t have been worse; the announcement arrived just before a key OPEC meeting during a time of active regional conflict, with supply already under strain.
Whereas the 1973 crisis emerged from an external assault on oil supply, we are now witnessing an internal rift that could have prolonged and severe repercussions.
The certainty of elevated volatility within the energy markets is irrefutable. The real question is: how can you position your investments to capitalize on this ongoing instability?
It begins by paying attention to two critical signals.
The Key Indicators to Monitor During Oil Volatility
Having navigated the energy markets for close to three decades—from the futures pits to the options floor—I’ve recognized that deciphering existing market signals is more effective than speculating on future price movements.
Essentially, two key signals guide this understanding. They aren’t predictions, but crucial instruments for seasoned traders.
The first is the crack spread. This figure represents a refiner’s profit margin. Imagine it as a bakery: your input is flour (crude oil), and your output is baked goods (gasoline and diesel). The crack spread is the difference between the cost of the raw material and the sale price of the final products. When the crack spread widens, refiners tend to see stock prices reflect that increased profitability.
Source: https://rbnenergy.com/market-data/3-2-1-crack-spread
As of now, the crack spread is expanding—refiners purchased crude at lower prices weeks ago and are now selling the fuels derived from it at significantly higher market rates. This discrepancy is pure profit, reflected in their earnings right now.
That’s our first significant indicator.
The second signal is backwardation in the futures market. This term might sound complex, but here’s the essence: when near-term futures contracts are priced above those for further dates, it indicates a willingness to pay a premium for immediate supply. This reflects a market consensus that current supply is inadequate to handle immediate demand.
The latest WTI futures data supports this, illustrating a strong preference for near-term contracts as various market participants seek to secure oil quickly.
https://www.cmegroup.com/markets/energy/crude-oil/light-sweet-crude.settlements.htmlMarket perception is that immediate supply is tight, while expectations for easing pressures longer term remain muted.
This insight is crucial as it indicates where capital is currently flowing: into assets that are benefiting from immediate supply constraints—specifically refiners and select producers operationally linked to U.S. supply chains.
When both the crack spread widens and backwardation is observed, it presents a compelling opportunity: the market signals that refiners are profiting significantly while demand pressures are being reinforced by a tight supply outlook.
This combination historically leads to substantial upward movements in stock prices of energy firms.
Let’s illustrate this with a practical example from earlier this year.
A Successful Trade Exemplifying the Signals
In April, both critical signals flashed simultaneously.
The crack spread was indicating higher margins, and the WTI futures market reflected backwardation. One particular name continuously emerged in my analysis: CVR Energy Inc. (CVI), a refined player poised to exploit the conditions forecasted by these signals.
By April 20, I entered a bullish position on CVR for my subscribers. The setup was straightforward. The indicators were aligned, and the risk parameters were clear.
In just one week, we scored an impressive 80% return on this well-researched refiner.
This outcome wasn’t coincidence. It showcases the power of interpreting market signals instead of merely guessing price trajectories. The widening crack spread suggested ample profits for refiners, while backwardation indicated significant supply tightness. CVR stood as the most appropriate vehicle for capitalizing on this market sentiment with manageable risk.
The process is simple: identify a catalyst, recognize the signal, and execute the trade. This cycle is the cornerstone of my approach.
Now, we see both indicators signaling once again.
The crack spread is expanding at a remarkable rate, and the futures curve reveals pronounced backwardation. With the UAE’s exit from OPEC introducing an enduring layer of ambiguity, coupled with persistent pressure on the Strait of Hormuz, the previously successful setup is emerging once more. The same market players—refiners, select producers, and U.S. supply chain-focused companies—are positioned to gain in this environment.
The critical question is whether you've equipped yourself to act on these opportunities before the broader market catches wind.
How to Navigate This Landscape
As I often remind my members: be aware of your strengths and recognize areas in which you might seek assistance.
My strengths lie in my ability to read market volatility and identify setups before they become apparent to most. What often proves challenging—even for experienced traders—is determining direction. It’s not a matter of whether volatility is on the horizon, but rather whether the upcoming movement will skew upward or downward.
This is where Marc Chaikin becomes invaluable. With decades of experience, he has developed quantitative tools utilized by major institutional players to predict market trajectories. His approach complements mine perfectly; while I focus on spotting potential volatility, Marc delineates whether the shift aligns with institutional money flow.
Together, we have devised a combined strategy we’re calling The Convergence. On May 28 at 8 p.m. Eastern, we will present it live for the first time. (Book your spot at this free event today.)
The global oil market is in flux. The signals I’ve discussed are already active. The opportunity to capitalize on these shifts before Wall Street reacts is fleeting.
This event is complimentary and marks the first occasion we’ll present the synthesis of these methodologies to an audience.
Don’t miss your chance to secure your spot.
A nimble trader is always at an advantage,
Jonathan Rose
Founder, Masters in Trading
