The one party that continues to roll on in the midst of a very quiet energy sector remains refining. But you must be particularly careful where you go here, as many of these issues are now incredibly overextended and are finally facing some fundamental headwinds.
During 2012, the energy sector has been an awful place to be, but the refiners were a strong island in an otherwise stormy sea. Some of the best performers in the S+P 500 outside of financial stocks have been the refiners, particularly those in the midcontinent, taking advantage of an unusually wide WTI/Brent spread -- stocks like Tesoro (TSO), Western Refining (WNR) and CVR Energy (CVI).
Fundamentally, there shouldn't be any reason to get out of these high flying stocks. The oil market deals in two financial benchmarks to determine global prices for crude, Brent oil from the North Sea and West Texas Intermediate, priced in Cushing Oklahoma. The North Sea has continued to see a declining production profile, causing an almost endless loop of supply tightness, while the Cushing surplus seems to be unsolvable, even with the added drain coming from the newly opened Seaway pipeline. These two fundamental pressures on these two individual benchmarks should assure spreads stay inordinately wide and refiners in the mid-con would continue to enjoy large profit margins for many more quarters to come.
And yet, we've been in a very strong downtrend in the WTI/Brent spread,…