The most compelling news of the week in the energy world was the International Energy Agency’s (IEA) mid-term report, calling for a ‘supply shock’ from North America’s increasing oil supply.
For those of us in the daily trading game, these ‘revelations’ are hardly that, we’ve been well aware of the hyperbolic growth of supply from tight oil in the US from the Eagle Ford, the Bakken and elsewhere, the growing supply from Canadian oil sands in the Athabasca, and the new and stunning deepwater finds in the Gulf of Mexico.
So, it has been hard to translate those IEA findings into a trade that is truly ‘new’ – Bakken shares in quality E+P’s like Continental (CLR) and EOG resources (EOG) have been strong and levitating quite nicely already, as have Canadian shares of Suncor (SU) and Marcellus plays like Cabot oil and gas (COG) and EQT resources (EQT).
What I’d like to find going forward is the stock that hasn’t yet benefited from this supply shock here in the US, not necessarily from the increased supply, but in fact from the decreasing supply in Europe and perhaps a long-term arbitrage that is being created.
Perhaps I’ve found it in the refining space.
Here in the US, crude oil is not legal for export, yet refined products are. With an increasing supply of crude coming on line and a demand profile unable to soak up the increase of refined products that will be produced, there is a increasing export potential for gasoline, heating oil and jet fuel overseas, where local prices for refined products will remain very dear indeed.
And now is a very good time to position oneself for that coming arbitrage, as WTI/Brent spreads, the ‘tell’ on refining margins, have been under recent pressure, a pressure that just cannot last. That pressure, however, has pummeled refining stocks from lofty high prices, and set up this opportunity to position oneself for the long haul.
One refiner well positioned to ultimately take advantage of a multi-year gasoline refiner arb is PBF Energy, a company formed from the Carlyle group, which purchased refineries in Delaware and New Jersey. Besides investing in the difficult East coast space, PBF also invested in rail cars to move cheap Midwest crudes to their refinery terminals, only to see those investments made bad by the narrowing WTI/Brent spreads.
I believe the investment in crude-by-rail will prove to be only ill-timed and only temporarily bad – as the European refining arb widens, PBF will find an even more generous market with which to ship its refined products and it’s proximity to the East Coast will make that market that much more accessible.
With share prices now just above $31 after seeing prices as high as $40, PBF shares represents a terrific opportunity to position oneself for the long-haul European refinery arbitrage and with an equivalent 4% dividend yield, this is the perfect time to start. I’m adding PBF to my portfolio.