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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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Two Energy Ideas: Refiners and the Back of the Crude Curve

Two energy ideas to touch upon today, now that the debt ceiling debacle is (at least for now) over:  Refiners and the back of the crude curve.

Refiners have caught a bid recently and, out of the blue, some of them have rallied more than 10% in less than two weeks.  The downturn in these stocks was fairly easy to see coming, even if it was overdone – but the subsequent rally in the shares was far less easy to see.

I’ve thought that through the 3rd quarter we’d see a compression of the WTI/Brent spread, a proxy for cracks and refining margins.  From that compression, we’d see a less than stellar report from the refiners come October and some stock weakness.

For a brief moment during the 3rd quarter in fact, we even saw WTI prices go over Brent, proof that – once again – oil traders are constantly befuddled by this benchmark ratio and how to play it (and I include myself in this characterization).

Difficulty in Libyan supplies, squeezing Brent, combined with a few mid-con refining outages here in the US, caused a further surplus of crude in Cushing.  Together, they’ve pushed the spread back out between the two benchmarks to close to $10 in very short order – catching a load of traders both short the spread and short the refiners.  

But is this quick trend buyable?  Should we reload on refining stocks today?

You’d intuitively think not – both physical difficulties I mention seem to be short-lived and should disappear almost as quickly as they’ve arisen, causing most analysts to say that this rally in the refiners needs to be sold.  Indeed, nothing will change the quarterly reports for the 3rd quarter that are already being prepared and will become public in the last week of October and first week of November.  And they will be – almost universally – bad.  

But I’m preparing to take the other side of that trade.  You can be almost sure that the refining stocks (pick your favorite – Valero (VLO), Tesoro (TSO), Western (WNR), CVR refining (CVI), Holly Frontier (HFC), Phillips 66 (PSX)  will all sell off going into their quarterly reports and go down further upon their release.

They will all be bad.

But there is the opportunity.  I grow tired of hearing how both the geopolitical squeezes in Brent and the surpluses in Cushing are ready to clear – I’ve heard these arguments now for more than two years and every time it seems ready for WTI to take it’s historical place at a premium to the Euro benchmark, it goes in the opposite direction.  And I’m tired of being on the wrong side of this trade.

Wait for the bad reports – and then buy the refiners.  Even this small period in the 4th quarter of $10 spreads will make their 4th quarter reports far better than what they’re going to report two weeks from now.  And, if you get a sustained surplus, a failed filling of the ‘new’ keystone pipe, another problem with the Seaway pipe or a hundred other problems, you’ll get a monster rally in the refiners from the lowly depths they’re in now through the rest of 2013 and into 2014.  

Quick idea two:  Did anyone look to buy back month crude oil as I suggested a few weeks ago as the ‘best investment opportunity I see right now’?  Well, while crude has mostly hovered during the debt debate, back crude hasn’t, already starting to close the ridiculous backwardation that existed – it’s closed more than a dollar and a half. I think there’s a lot more to come.  Keep buying the back months.

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