Refiners: A Bankable Energy Play

The sub-sectors of energy are where big money is made in trading oil stocks - we must decide where the next move will be and be ahead of it, as oil and natural gas continue to play around in the bust cycle while preparing for the next boom.

So, where is the opportunity now? Is it in the independent E+P's? In oil services? In pipelines? Natural gas stocks?

I'm betting it will be in the refiners.

That's a bold call, considering that an enormous refined products glut has been behind much of the return back from $52 a barrel to close to $40. It's been the higher price of oil and squeeze of the WTI/Brent spread that has decimated margins as well for refiners and forced their prices way back down.

And it's important to note just how far down they've gone:

(Click to enlarge)

(Click to enlarge)

All of the refiners have underperformed the rest of energy for reasons I have named, and others yet to show themselves: There has not only been an increase in crude stockpiles based upon the lowered refinery utilization in the last several months, but a quicker conversion to winter blends this year than last, which yields an even lower margin than summer blending does.

So, how can I be bullish on these stocks?

For one, margins can literally get no worse - all of the regional crack spreads, from Chicago, the West Coast, East Coast and the Gulf - are way below 5-year averages.

And something even more fundamental is about to change.

Check out these charts from Scotia Weil: Days of demand cover for refined products are starting to take a nosedive, just at the time of year when normally stockpiles would go up. Domestic refiners are finding export markets for excess gas and heating oil and adjusting to demand that has risen, but not as much as they expected.

And the IEA is wisely figuring out that refined product demand in Europe and elsewhere is about to increase: Refiners' crude processing this coming quarter, will increase by 600,000 barrels a day from a year earlier to a record 80.6 million a day. Further, the drop of 480,000 a day between April and June amid the glut of fuels is about to completely clear, according to the agency.

All of this points to a value play on refining stocks.

While oil companies seem to have gotten a bit ahead of oil's price, refiners have suffered and now represent a bit of a relative value. And as I wait for the E+P's to correctly adjust to an oil price that isn't going above $50 in the next quarter, I'm looking for a bankable energy play in a depressed energy subsector.

And that's the refiners.