Oil Tensions in the Middle East Could Lead to 32% Gains from This Trade

First Egypt erupted, then Libya exploded. Investors might certainly wonder where the next Middle East powder keg will ignite and what effect it will have on crude oil prices. Analysts speculate there is already a $10-a-barrel "risk premium" built into crude, and that premium can go even higher if the unrest spreads.

Despite the rising price of crude now hovering near $100, in recent months "crack spreads" -- the difference between the amount a refiner pays for crude oil and the cost to refine this oil -- has also been on the rise.

Since September 2010, the crack spread is up nearly 400% -- from about $6 a barrel to nearly $23. In mid-February, it hit its highest level since 2007.

How can youprofit from this combination of a high crack spread coupled with soaring crude oil prices? There's a particular stock that benefits from both trends and that stocks is Marathon Oil (NYSE: MRO ) .

Marathon, the fourth-largest oil and gas company in the United States, explores, produces, refines, transports and markets oil and gas.

As a result of this exploration and refining combination, the Houston-based company is well set-up to weather any storm, no matter where oil prices head.

Traders might take advantage of this opportunity while they can. By the end of June, Marathon plans to spin-off its refining and marketing operations into two pure-play companies.

The first, Marathon Petroleum Co. -- pegged at a value of about $13 billion -- will become an independent refiner and marketer, while Marathon Oil -- valued at about $47 billion -- will become an independent producer.

For traders, the spin-off means the companies should be worth more as independent entities. However, those who purchase the stock now would acquireshares in both companies.

Spin-off discussion as well as rising crude and a high crack spreads have sent shares rallying in recent weeks. During the Feb. 14 trading week, Marathon hit a two-year high of $50.56, and again attempted to test that level this past week.

-- Dr. Melvin Pasternak

For much of 2009 and 2010, Marathon was caught between long-term historical support, near $26.10, and old resistance, which has become new support, around $34.18.

Finding strength in August 2010, at around $29.66, the stock formed an intermediate-term uptrend line. In late December 2010, Marathon broke old resistance, now new support, near $34.30, bullishly completing an ascending triangle .

Now on an accelerated uptrend, Marathon shares have been surging. The stock appears to be close to completing a second small ascending triangle pattern, marked by resistance near $50.56.

If shares can break resistance, the measuring principle for a triangle -- calculated by adding the height of the triangle to breakout levels -- projects a price target of $66.82 ($50.56 - $34.30 = $16.26; $16.26 + $50.56 = $66.82).

Fundamentally, the stock shows strength.

Fourth-quarter revenue rose 26% to $20.2 billion, from $15.9 billion in the year-ago quarter. Much of the increase was due to higher oil and gas prices received by the company.

For the full 2011 year, analysts project revenue will increase 9.9% to $90.4 billion from $82.2 billion in 2010. By 2012, revenue is expected to rise a further 8.7% to $98.3 billion.

Due to higher oil prices, combined with strength in the company's refining and marketing businesses, fourth-quarterearnings nearly doubled to $0.99, from $0.50 in the year-ago quarter. For the full 2010 year, Marathon earned $3.61 per share, compared with $2.06 per share in 2009.

Marathon is attractively valued with a forward price-to-earnings ( P/E ) ratio near 8.8 and a price-to-sales ( P/S ) ratio of about 0.2.

Action to Take--> Given that Marathon could prosper in a variety of pricing scenarios for crude, traders could go long on this stock and expect a nice return. However, before entering the position, I would wait for the shares to rise above current resistance at $50.56 by placing a buy-on-stop order. This means if Marathon does not hit or go above $50.76, you will not enter the position.

A reasonable target is $66.82, as calculated by the measuring principle. That means you could make 31.6% on this trade if all goes according to plan. My stop-loss is $46.91, just below the current intersection of the accelerated uptrend line.

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Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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