If you're not familiar, OPEC is group of 13 oil-producing countries that collude (in the most legal of ways) to help control oil prices (i.e. keep prices at levels where they can make the most money by selling the most product the market will bear). Love them or hate them, they do control more than 80% of the world's oil reserves. But their influence is becoming less powerful, as they only account for less than half of global oil production.
There's been a lot of whoop-dee-doo about OPEC's recent decision to cut oil output, and even non-OPEC members are supposedly getting in on the action to scare oil prices higher. Fortunately for us, these scare tactics are mostly baseless.
The deceptive headlines seem ominous, but the data reveal the truth. These "massive cuts" really only bring production down slightly from record levels and are only temporary.
Even excluding U.S. production, oil is still being pumped at near record amounts.
OPEC's "cuts" still leave production higher than it has been in all of history. OPEC sneakily boosted production leading up to the cut to make it look like they were really doing something drastic -- but it was all a shell game.
The tactics worked initially, sending oil up 31% from its November 2016 lows of $42.20 to a high of $55.24 in January, but prices have since come back down, and OPEC seems to be panicking.
Even though OPEC has already "slashed" production, prices aren't moving higher as planned. The failed plan to boost prices is causing infighting between members because some aren't cutting production as much as they promised.
Many of these countries depend on oil sales to keep their respective countries running. And if these oil ministers see that prices aren't rising, they will be inclined to sell as much as they can at current levels just to maintain the budget. Their actions are a "bearish tell" on oil prices.
By my estimates (and those from some very powerful firms, like Goldman Sachs), even the most dramatic OPEC antics aren't going to be enough to push oil prices much higher. In fact, a recent Goldman report predicted oil prices would be weak for the next three years!
Another problem for OPEC is that there are more producers in the market, like the United States, that have increased production with the modest price increases, adding to a glut of oil that's prevailed since mid-2014.
Storage overflows and even more U.S. producers coming back online are putting increasing pressure on oil prices.
With oil between $45-$55 (which is where Goldman Sachs expects it to stay), the target for my most recent Profit Amplifier trade is set to reap serious profit rewards.
Summer Driving With A Big Crack Spread
A mild winter, strong economy and moderate fuel prices should mean more Americans take to the streets for road trips. According to Bloomberg, the current environment could spur the busiest summer driving season in years. Excessive fuel consumption might help support oil prices, but it's especially beneficial to refiners like the one I recently recommended for our simple, proven options trade in Profit Amplifier.
The EIA predicts strong total gasoline consumption in 2017 and record consumption into 2018. But there's a fact that many investors don't seem to be paying attention to... yet.
The "crack spread" is the difference between wholesale petroleum products, like gasoline, and crude oil prices. In simple terms, a bigger crack spread between crude and gasoline means bigger profit margins for refiners like Valero (NYSE: VLO).
The above chart shows the crude/"Rbob gasoline" crack spread was only 16.6 when VLO was at its all-time high in January. The crack spread is now nearing 20.5 as we're about to enter the highest gasoline consumption season of the year. That means bigger margins and more sales for Valero.
JP Morgan recently upgraded VLO to a "strong buy" and noted the improving crack spread scenario before slapping a new $72 price target on the stock, just slightly less than the consensus target of $72.70 -- but still about 10% above current prices.
My point is that Valero already reported some weakness in some of its margins in its previous earnings report (remember that crack spreads were low earlier this year). The company also spent more money than most analysts thought.
Even with those detractors, the stock is still close to its highs, meaning the bar for the stock is very low.
But with the crack spread improving nearly 100% from its 2017 lows, and Valero not expected to spend a dime on the Keystone XL pipeline (even though it would be a customer), its financial situation should look that much better going into Q2 and Q3.
VLO Is A BUY. Now, Let's Amplify Our Gains...
At just 13.2 times forward earnings and delivering a 4.2% dividend, VLO is a value stock that's also defensive with a fantastic growth outlook that still hasn't been fully realized by investors.
Doubts about Trump being unable to execute his promises for the Keystone pipeline have held shares of Valero back for no reason. All Valero needs is strong fuel consumption, a good crack spread and for oil to stay below $55... all of which are occurring now. The XL pipeline would only benefit the stock further, and none of my current estimates have anything to do with its completion or failure.
And Valero couldn't be better positioned to capitalize on the current scenario as its refineries are ready to produce. As the largest Gulf Coast refiner, Valero can turn the glut of oil in the gulf and in Cushing, Oklahoma into high-margin fuels for this reinvigorated economy.
At the very least, I see the summer driving season pushing shares of VLO back to recent highs of $70.
Now, a 6% gain in just a couple months isn't bad for regular investors. But thanks to the conservative options strategy my readers and use at Profit Amplifier, we have the opportunity to magnify this into a 31% profit by June.
That's the power of options when you know how to use them properly. If you're interested, I invite you to check out this special report, where I explain the simple technique we use to make rapid gains like this possible.
This article originally appeared on StreetAuthority.com.