The refiners have been a very ‘feast or famine’ trade group that I have been wary of playing. But with widening Brent-WTI spreads, along with the collapses of other benchmarks here in the US, I now believe that there is a long-term positive margin trend that is developing. With refining stocks like Tesoro (TSO) and Phillips 66 (PSX) nearer to their 52-week lows, I’m looking for new highs to be made in both stocks. It’s time to buy.
I’ve watched the refinery group make tremendous gains in 2011 and 2012, as WTI/Brent spreads, which are a proxy for refinery margins, soared to unbelievable heights, reaching over $20 at one point. Those stocks just as disastrously fell as the spread did, dropping to near parity at one point this summer. Many of the refinery stocks still have not moved much from that low price point.
But WTI has again shown tremendous weakness to the European benchmarks, because of increasing production from the Bakken, Eagle Ford and Permian shale plays, as well as the endemic outages of refineries in the Gulf Coast and slow refilling of the critical pipelines that service that area.
Some analysts believe that these are temporary trends, but I’m convinced they are not, and one reason I’m in the camp of long-term refinery advantages is because of the relative price action of two OTHER benchmarks of crude pricing, Mars and Louisiana Light Sweet.