In one of your post re: Venezuela you indicated that Venezuela exports Gasoline and that their refineries are probably not good to go.

Goldfinger, in another post says that there is more profit to be made taking a position on Gasoline.

If both these statements are true, then would it not be wiser to take a position on refined gasoline than on crude?

Bill in South Carolina

-- Bill Solorzano (notaclue@webtv.net), December 14, 1999

Answers

Here's the deal with Futures. The amount of potential profit, is always in balance with the cost of Margin. So, wheather you're in wheat, or corn, or oil, or T-bonds, the risk/reward ratio is almost exactly the same.

Another point might be, if you don't know enough about the markets to see this relationship, your "timing" or entry into whatever market, will probably offset whatever advantage you think oil or unleaded gas might have.

I'm not trying to discourage you, but I think an overall safe approach would be buy Call Options. You only risk the amount paid, and can profit even more (based on intial investment) than a futures contract, if you buy "out-of the money" options.

You would be betting that there will be a significant price rise, within the option lifetime. As good a play as any at this point.

So, either one, but oil has more liquidity I believe. ( I don't track Unleaded Gasoline)

-- Gregg (g.abbott@starting-point.com), December 14, 1999.

Greg's right, crude oil has more liquidity in the options. On the futures there's plenty of liquidity on either. Liquidity is only one minor factor though.

When studying NYMEX markets, the relationship between gasoline and the crude oil is called the gasoline crack - its the margin refiners make by cracking crude oil into gasoline. Gas cracks have been cheap. They don't reflect any real rollover risks- or in other words they're telling me 'smart money' isn't expecting any refinery shutdowns for the rollover or operational disruptions. One reason for this- after a string of weekly API inventory reports that reflected brisk gasoline demand, last Tuesday's showed a drop off in gasoline consumption. Is it a one week aberation or will the strong demand return on tonight's API inventory report? I think some hoarding should be reflected on tonight's report via strong gasoline consumption levels but I'm leary of API's info mgathering and motives. Unlike most commodities, the API is an self serving industry group that gathers its own info from its own members. They don't even contend to be unbiased. Any y2k info they've put out has been circumspect (ie any y2k concerns in the oil industry 'have no basis in fact').

My main advice is to diversify buy some gasoline calls and some crude calls. But here's even better advice. We have a regime of cold weather moving in. My weather guys says the real below normal temps will hit around Christmas so get into heating oil calls .

Obviously if there are refining disruptions, or even just precautionary shutdowns on the rollover, the gasoline and heating oil calls will preform better than the crude calls.

Good luck! You greedy profiteers!

-- Downstreamer (downstream@bigfoot.com), December 14, 1999.

Options you have to be correct on the move up or down, with futures you need to be correct on the move and the time.

-- Squid (Itsdark@down.here), December 14, 1999.

Just a correction - With Options you have to be correct about the direction, time, and hope the volatily doesn't go against you. Option values are based on : 1. Interest Rates 2. Strike Price 3. Underlying Securities Price 4. Time to Expiration 5. Volatility

It is possible to be right about the time and price and even magnitude of the price move, and not make money due to a drop in volitility. But, any, "in-the-money" option, will behave almost identically to the Futures contract.

With a futures contract, time is still a factor, since the various Months of the contract do expire.

I suggest a March or April call optioin strategy. Remember, those options (at least Oil) expire the MONTH BEFORE. Hopefully you have a broker who can help you if this is greek to you.

-- Gregg (g.abbott@starting-point.com), December 14, 1999.

Hi Bill,

I think all of your questions have already been answered.

However I disagree with the anlysis that says refining capacity in the USA will not be affected by y2k. Listen to John Whitley on the Jeff Rense show on Nov. 30th (www.sightings.com 1999 archives) - whereby he cites a (now removed) analysis that predicts up to a 70% drop in refining capacity due to embeddeds and elctical problems...

If this is true go for "downstream" refining call options i.e. Heating oil and Gasoline.

Good luck,

-- Andy (2000EOD@prodigy.net), December 15, 1999.