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Why Wall Street Is Bullish On Refiners

Wall Street

WTI tumbles below $47 as negative sentiment about excess crude supply grows in light of extended refiners’ shutdowns, while Wall Street piles on with more detailed estimates about Harvey's impact on U.S. oil and refinery production.

(Click to enlarge)

As oil slides, crack spreads have stabilized near the highs of the session, on concerns about gasoline availability, with Tudor Pickering saying that crack spreads could continue to rise in coming weeks in other U.S. regions served by the Gulf Coast refining center.

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As reported earlier, about 15 percent of U.S. refining capacity was offline Monday morning as the remnants of Hurricane Harvey continued to pound Texas and the Gulf Coast.

(Click to enlarge)

Furthermore, the reason why oil is rapidly sinking is that according to Goldman (and others) estimates, Harvey's impact would be to significantly increase domestic crude availability by 1.4 million barrels every day, while removing 615-785 kb/d of gasoline and 700 kb/d of distillate supplies.

And while some of the biggest refining companies in the world were affected, analysts expect shares of refiners to rise this week on wider crude differentials and stronger crack spreads. Mid-continent refiners like Delek US Holdings Inc. and HollyFrontier Corp. may be best positioned to outperform, and PBF Energy Inc. could also benefit given its exposure to the northeast. Here is Bloomberg's summary of why while it expects further pain for oil bulls, Wall Street is now bullish on refiners:

Wells Fargo (Roger Read)

o In prior major hurricane strikes on the Gulf Coast, shares of refiners have outperformed the major indices by 6 percent-19 percent in the 10-20 days following landfall.

Related: Is OPEC Throwing In The Towel On U.S. Market Share?

o Harvey is expected to hover over southeast Texas through the middle of the week and refinery disruptions are expected to persist, with crack spreads remaining elevated and refining equities responding positively.

o Estimates more than a quarter of Gulf Coast refining capacity is offline, or about 15 percent of total U.S. refining capacity.

Raymond James (Justin Jenkins)

o Refiners’ margins, earnings and stock prices tend to benefit from period of disruption like this, even if their assets are negatively affected.

o Wider light crude differentials and stronger crack spreads boosted stock prices an average of 4.5 percent last week, and cracks have strengthened further on surging gasoline prices.

o Mid-continent-focused refiners like DK and HFC may be best positioned given widening crude differentials and unaffected operations; PBF could also benefit given its exposure to the northeast
Goldman Sachs (Neil Mehta and Damien Courvalin).

o As of Sunday night, 12 percent of U.S. refining capacity was offline due to the impact of Hurricane Harvey, with XOM, RDS, PSX, VLO and MPC among the companies affected.

o Expects near-term strength in U.S. refining margins but limited impact on earnings and valuation; maintains buy ratings on ANDV, MPC and DK.

o Loss of capacity will further support margins for non-affected refiners, but it will also lead to a weakness in domestic crude prices.

Tudor Pickering

o If Hurricane Harvey moves up the Texas coast toward Louisiana then additional shutdowns could occur in Port Arthur, Beaumont and Lake Charles, with up to 25-30 percent of U.S. domestic refining capacity could be shut near term.

Related: Hurricane Harvey Causes Gasoline Price Spike

o Crack spreads could continue to rise in coming weeks in other U.S. regions served by the Gulf Coast refining center.

o Estimated supply disruptions will be in 1-2-week range.

o See 400k b/d Gulf of Mexico oil production impact, to last days not weeks; +300k b/d of Eagle Ford production impact will only last days.

By Zerohedge.com

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