Buy Refining Stocks Ahead of the Oil Bubble Burst

7/8 - "Recently, many investors have begun to speculate that the bull run in crude oil prices has reached bubble-like proportions. Some folks are saying that "speculators" have driven the price of crude to unsustainable levels and a painful correction is just around the corner...There's one sub-sector of the energy industry that would actually benefit big time from such an oil correction: Refiners."

"...profits at U.S. refinery operators plunged 98% in the first quarter because they were caught behind-the-curve on skyrocketing oil prices. Refiners have been raising prices to be sure. But they just haven't been able to hike prices for gasoline, heating oil, and jet fuel fast enough to keep up...These stocks have sunk 40% even as oil prices set new record highs. But the key to refinery profits is what's called the crack spread.

The crack spread is the theoretical profit margin a refiner should earn from processing three barrels of crude into two barrels of refined gasoline and one of heating oil. That spread has plunged 38% over the past year...But crack spreads, like so many relative price relationships in financial markets, are constantly shifting from peak to valley and back again...In the last month alone, refining company executives have purchased US$2 million worth of their own shares, according to Bloomberg."

"Unfortunately, there's no ETF I know of that gives you a broad based bet on the refining sector, at least not yet. Several leading refiners including Valero Energy (VLO) and Tesoro Corp (TSO) are among the stocks with big recent insider buys, according to Bloomberg...here's a pairs-trade twist that goes long-long — perfect for retirement accounts...Buy the ProShares UltraShort Oil & Gas (DUG), which is designed to go up in price as the overall energy sector declines. "