“Just last month you were singing the praises of refiners. Does the recent volatility in the energy sector have you singing a different tune?”
This was the first email that popped in my inbox this morning and boy did it get me thinking. Lately my inbox has been flooded with questions on the energy sector—especially refiners—so let’s take a moment today to set the record straight.
What has happened to refiners?
Despite the domestic energy boom (brought about by oil fracking technologies), energy stocks have had a wild ride of late. This glut of light sweet crude in North America is still set to pad refiners’ profits, but that is being overshadowed right now by the price convergence of U.S. WTI crude oil and its international equivalent, Brent. Just last week the Brent/WTI spread narrowed to its lowest level since November 2010.
And the strong U.S. dollar isn’t doing energy stocks any favors. That’s because when the dollar rallies, it shoves down the price of oil. Meanwhile, there are rising concerns about the political instability in Egypt, has put pressure on refining stocks lately. Fears that trade through the Suez canal would be disrupted caused domestic crude oil prices to spike to a 14-month high. Some investors mistakenly believed this would adversely impact profits so this put pressure on refining stocks.
Is this the beginning of the end for refiners?
That being said, I don’t recommend you sell the (energy) farm. So no, I don’t think it’s the end. In fact, I remain optimistic about the long-term prospects of several energy plays (I’ll get to those in a moment). The thing that many don’t realize is that even when crude oil prices rise, refiners have a lot of leeway in passing along the costs to consumers.
So even through all of the drama in Egypt, refiners should bounce back. We are in the midst of summer road trip season, and this is typically when gas prices trend higher. We’ve started to see this already—just today the Commerce Department announced that gasoline prices jumped 6.3% in June—the most since February. And hardly anyone profits more from higher gas prices than refiners.
My Final Verdict
Between higher gas prices and the energy surplus in North America (which won’t be going away anytime soon), I’m still comfortable with a handful of premium refining stocks. I’m sticking with what I said earlier about refining stocks.