A year or two ago, oil companies were easy targets for consumer opprobrium. Record profits were scored by the majors while drivers were left steaming at the pump over ever-rising prices.

This year, it's different. At least the record profit part. Big Oil earnings have declined significantly - on the order of 70% or more - in the second quarter as independent refiners see their margins squeezed as well.

Refining's a cyclical business. Sometimes profits are fat; other times they're slim. And at times, things get so bad it's not worth lighting up the boilers. The best profits are reaped when distillate product prices are high and crude oil input costs are low. As we've seen in "Time For Crack Spreads?" it's in the fall when the so-called crack spread starts to widen. Crack spreads represent the gross profit obtained from purchasing crude oil feedstock and selling refined products such as gasoline and heating oil.

Trade the crack spread over a few seasons and you'll soon see how capricious refining profits can be. This year, the volatility in a 2-1-1 crack spread (two crude contracts versus one each of heating oil and gasoline) has been 144%. To date, the spread's up 9.5% this year, but it's swung widely from gain to loss and back again, up 130% at one point, then running a 26% loss at another. The 2-1-1 crack's reward-to-risk ratio of .07 pretty much sums up the year-to-date performance.

Less volatile has been version of the crack spread that employs exchange-traded funds on oil and distillates instead of futures. For example, you can simulate the cost structure of a 2-1-1 refinery operation by purchasing the ProShares UltraShort Dow Jones-UBS Crude Oil Fund (NYSE Arca: SCO) along with shares of the United States Gasoline Fund (NYSE Arca: UGA) and the United States Heating Oil Fund (NYSE Arca: UHN). A share-for-share package this year would have produced an 8.2% return with only 29% volatility. The ETF spread's reward-to-risk factor, at 0.28, is four times better than its futures analogue.

Crack Spread: ETF Vs. Futures

The mildness in the ETF package's volatility makes timeliness less critical when establishing a seasonal crack spread. The consequences of being too early or late are far less onerous compared to futures. To boot, no margin is required.

So when you're thinking of taking a walk in a refiner's shoes this fall, think of getting fitted for ETFs first.

*Note: To provide a longer-term perspective, we've pushed back the base for our real-time monetary inflation indicator to May 2006. The base previously was January 2008. The indicator represents the average annual rate of monetary inflation over the period. The current 12-month inflation rate is -1.5%.