Refiners are showing an opportunity, should they continue to drop after the Iranian nuclear deal. With targets that are in reach for some of my favorites, I think there might be some hope to buy some value again with Marathon Petroleum (MPC) and Valero (VLO).
Dedicated refining stocks dropped precipitously on the back of the Thursday announced "deal" with Iran in Lausanne, Switzerland. But what kind of deal do we actually have? There is no agreement on the final numbers of centrifuges, how more advanced spinners are to be destroyed, the format of inspections -- just about everything that would constitute a real agreement. It was clear that the Obama administration was intent on signing something and hoping compromises would come by June. We'll see.
For our purposes of the oil market, the real question is when sanctions begin to be lifted, because that is when Iranian oil will begin to flow into the market. It is the prospect of this new 500,000 barrels a day of crude ready to hit Euro markets that caused refiners to get pummeled, expecting these new barrels to decrease the Brent/WTI spread that has been the calling card of domestic refining margins and profitability.
The Iranians say sanctions disappear immediately as a final agreement is signed in June -- the P5+1, including the U.S., say not so fast. This is just another "small" detail not worked out in the nine months of negotiations, but supposedly yet to come.
My bet is that oil will begin to flow from Iran, but will find more back-channel passageways into China and India, and not into the Euro/Brent markets. These less transparent pathways for oil will withstand more strongly the reapplication of sanctions should the deal come apart at any point in the continuing negotiations and inspection process.
And this is important for Iran, as it probably does not plan on compliance anyway -- this is a country that has consistently cheated in inspection requirements and reporting of nuclear progress and materials. But sanctions are not turned on and off with a switch, and the cooperation that was necessary to really bottle up the Iranian economy, particularly from the East, will not easily be reapplied once sanctions are relaxed. This is what the Iranians are counting on.
For our U.S. refiners, that oil from Iran will definitely flow eastward, but probably not until early 2016 at the earliest. Iranian barrels still could affect European market prices, but not nearly as much as is feared.
With oil from Saudi Arabia pumping ever harder because of the new Iranian deal and new Iranian barrels destined to flow as well, refiners are still a lone bright spot in the space and worth buying. I had recommended them several weeks ago, came away as they reached above what I thought was value, but I am looking again as they come down here on the back of the Iranian deal.
With oil rallying today, you won't get the immediate chance; but Marathon Petroleum looks like a super buy under $95 a share, and Valero a choice of mine nearer to $55.
Put these on your watch list. As oil continues to increase in flow from these Mideast sources, you should get a chance to find some value again in a few refiners.
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