As the oil surge continues, trader Mike Khouw sees more upside in this surging name

There's a new crude reality on Wall Street. If you want to know where stocks are going, look no further than the oil market. 

European Central Bank President Christine Lagarde said Thursday, "If I had talked to you about refining margins six months ago, we wouldn't have known what we are really talking about, now whether you call it the crack spread or the refining margin, on liquid fuel, now we all know what it's about."

Earlier in the week, BoE Governor Andrew Bailey was apparently educating UK politicians on oil markets. Oil accounts for 40% of global energy production and 96% of transportation fuel. The absurdity of policymakers learning about oil markets now only highlights why investors shouldn't focus on internal debates about which monetary levers to push and pull.

Here's the gist of it. For the global economy to function, copious amounts of oil — 100 million barrels a day of the stuff — must be found, extracted, transported, refined into usable products and delivered to customers. That immense and complicated market does that automatically when producers and consumers are left to their own devices.

Nearly 1% of the global workforce works in the space, from drilling wells to pumping gas. Another 2% of the global workforce is employed indirectly — heavy equipment and ships, for example, don't build themselves. Policymakers' ignorance of oil market mechanics becomes clear only when geopolitics enters the picture and blows it all to hell, either figuratively or literally.

Global energy markets have taken significant disruptive geopolitical hits in recent years. The nationalization of Venezuelan oil/PDVSA by the Chavez/Maduro regimes, the sabotage of the Nord Stream pipelines, the Russia/Ukraine war, the current conflict in the Middle East, Iranian attacks in the Strait of Hormuz, and the Houthis attacks in the Red Sea and, in the past several days, on Saudi pipelines in the region.

As renowned energy trader John Arnold observed, the underlying supply posture was already bullish. Every passing day increases the needed investment, which oil companies can afford as oil prices have skyrocketed. Years of restrained investment, declining mature fields and pressure on spare capacity won't be solved by monetary policy or by drawing down inventories indefinitely — they're largely empty now anyway.

The biggest beneficiaries of the current disruption are the refiners. The crack spreads are the refiners' margins have never been wider. Those companies will continue to see record profits for several years, but their share prices are also at record highs, and eventually (hopefully?) refining capacity will catch up to demand, and product prices will come in.

Meanwhile, many oil service companies have rallied but are not yet trading at all-time highs. As semis benefit from AI-related capex, oil service companies benefit from investment in increasing oil production, and SLB is the largest of these.

For exposure, I like longer-dated long calls financed by shorter-dated short strangles.

Disclosures: Tidal owns/holds all the securities mentioned in the article.

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