The focus on gas prices is shifting into overdrive for most Americans as they hit the road for the Memorial Day weekend. And while prices at the pump have slipped a bit heading into the big travel weekend, they’re still at the highest levels since the summer of 2008. That makes this a great time to look at oil refining stocks.
As everyone knows, crude oil prices have had more than their fair share of mood swings in recent weeks, depending on whether Middle East protests or sluggish economic data were dominating the headlines. But there is a far less bipolar play for savvy investors still enamored with the oil sector: refining companies.
That’s because refiners’ profits don’t march in lockstep with crude oil prices because those companies take the base commodity and add value by processing it into products like gasoline and heating oil. The refining process adds so much value that the company can charge far more for the end product than it paid for the crude oil. That’s a no-brainer, right?
But here’s where it gets really interesting: the difference between what the refiner pays for a barrel of oil and how much it can charge for the gasoline refined from it is called the “crack spread”. The wider the spread, the bigger the refiners’ profit. And over the past 18 months, the crack spread has grown from about $6 to $20 – a more than 300% increase.
Refinery utilization rose by 3.1% last week — far more than expected. And despite a little slippage in that spread over the past couple of weeks (and some short-term challenges with Mississippi River flooding), refiners’ margins are likely to continue to widen.
As the economy strengthens in China and India, refinery shares also will benefit from the corresponding higher fuel demand. Companies that can continue to boost production while managing costs will be rewarded with better margins for the remaining year.
Here are 4 stocks with growth potential to keep an eye on:
Alon USA Energy (NYSE:ALJ): Alon’s stock has been on a tear of late, trading around $11.98 – nearly 80% more than its low of $4.77 last September.
CVR Energy (NYSE:CVI): This stock is also running wild, trading around $21 – an increase of nearly 180% over the stock’s 52-week low of $6.71 last July.
Valero Energy (NYSE:VLO): Valero is trading around $26.45, nearly 50% above its 52-week low of $15.49 last August.
Western Refining (NYSE:WNR). Western Refining is blowing the socks off the refining sector. The company is trading around $16.90 – a whopping 225% above its 52-week low of $4.01 last August.
As the sector continues to recover from the devastating effects of the recession, these stocks have the potential to be strong performers.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
