Gasoline prices have been on the rise, and the intuitive investor would love to buy the refiners to take advantage. But gas prices aren't indicative of refiners' margins -- in fact; it's the worst place to look for profitability on refiners.
As I've continued to warn you, there's been a summertime refining disaster going on here in the U.S., and the stocks are clearly reflecting that. And I don't think you should gear up to buy refiners such as Tesoro (TSO), Valero (VLO), Western Refining (WNR) PBF Energy (PBF) or CVR Energy (CVI) anytime soon.
How can that be? How can gasoline be rising at the pumps every day while refiners get killed? There are always two factors that go into any trade, any stock, any investment that we undertake. The first factor is the fundamentals, which for the refiners include the crack spreads, the West Texas Intermediate/Brent spreads, the outlook for crude supply in the Bakken and from Canada, the outlook for demand from summer driving, the raw numbers of stockpiles in Cushing, Okla., and at other nexus points ¿ all of these have been the subject of countless columns from me.
The other factor, the financial trade, is the factor that most investors cannot seem to fathom, cannot understand, cannot integrate into their investing and trading and cannot get straight -- but it is the cruciala piece of the price puzzle and it is the lifeblood of every trader. Know where the money is headed and the flow of capital traffic, and you've got a piece of information that will serve you much more completely than even the most comprehensive analysis of the fundamentals.
And with the refiners, there are two financial moves that have helped to destroy these stocks over the past month and will continue to keep them down for a while: the financial flight to crude from gold and the WTI/Brent spread trade.
Again, I've written and done extensive video about oil as the new gold, and this asset allocation rush into crude, particularly WTI crude, has pushed the input price for refiners higher more quickly than the retail price of gas can go. While pump prices are up about $0.18 in the last week, the price of the crude rally should have allowed more like $0.30 ¿ but the demand just isn't there. This has hit the refiners particularly hard.
With the WTI/Brent spread, all fundamental factors have pointed to a continuing strong differential to maintain itself through 2013, but the funds have been caught long spreads and are paying for it, and their unwinding of these spreads has put incredible financial pressure on margins, with $0.02 spreads now down closer to parity than in any other time since 2010.
For those refiners engaged in crude-by-rail programs looking to take advantage of the WTI/Brent arbitrage, the results have been the worst. If you're a refiner invested in long-term supply contracts by rail or have purchased railcars or leased terminals, it can be worse still -- I am thinking particularly of FBF Energy here. But all the refiners are feeling the pain.
Is it time to buy the crash? Virtually every oil analyst would suggest yes, expecting the recent Cushing stockpile drops and WTI/Brent spread narrowing to end very soon. For financial traders like me, this is the perfect tell that it probably won't happen.
Ye olde market rule: Markets react to cause the most pain to the most participants at any time, particularly when momentum is on their side.
Spreads have been coming in and WTI crude has been rallying, causing massive pain to funds and to refiners. Spreads going to parity or even with WTI going over Brent would be the kind of washout that would really turn up the fund heat that this market seems to be begging for.
And I imagine that's just what we're going to get.
Until that happens, refiners will remain capital B, capital A, capital D -- bad, BAD trades.