This column appeared earlier today on Real Money Pro.
Hurricane Irene brought a level of panicked hype from the media that is not rare these days. But traders knew better -- you could have gotten a far better forecast of the storm's path and damage from the NY harbor gasoline contract last week than from the frantic reporters at the Weather Channel.
NY harbor gasoline, traded on the Nymex, saw a fairly moderate 7½-cent rise during last week's run-up to the storm, moved by more than just the possibility of some refining disruptions caused by the storm. I say that this was a moderate move in comparison to other hurricanes I remember, including Hurricane Ike in 2008 and particularly Katrina in 2005. During the run-up to Katrina we saw more than a full dollar increase in gas prices as the storm raged toward New Orleans and the surrounding Gulf Coast refining assets. What was more interesting and even more volatile was the drop that gasoline futures experienced as the first flooded refineries came back online about a week after the disaster: Futures dropped more than 50 cents in only two days. The market always moves faster on the downside.
On Friday, traders were clearly less convinced of the potential destructive force of the hurricane and sold down gas futures by almost 3½ cents, even as crude futures maintained their price: a very prescient and savvy market reaction.
So, this happily wasn't the disaster that many had dreaded, but it still might give us some insight on the (only slightly) affected refiners.
This group has been mercilessly beaten down in the past month, and even super-strong refining margins maintained by the continuing disconnect between financialized WTI crude and European Brent crude apparently are not enough to keep the shares of the major independent refiners afloat.
There is a parallel to be drawn between the refinery stocks as they reacted to Katrina and Rita in 2005 and the present that might give us a little more reason to look upon these shares as a bit more of a value play here.
We saw in 2005 the runs of both independents Valero (VLO) and Tesoro (TSO) on the back of Katrina and the also fairly predictable retreat after service was restored. But these stocks never returned to "pre-storm" levels and in fact used that storm as a catapult to move their shares significantly higher for the next two years.
What's important is that sometimes even underappreciated catalysts can have long-term positive effects for stocks -- so even if Irene wasn't the advertised disaster it might have been, it still may have charged the refiners to make a long-overdue run. It was particularly telling to me that the refiners as a group were up 4%, 5% and even 7% on Friday, despite the falling gasoline futures prices.
And I'll give you two charts to consider, both of which show pretty nice setups for bull runs to come. Have a look at Western Refining (WNR) and Valero:
Both are showing stochastic crossovers from exceedingly low levels, while they closed Friday over their 20-day moving average. Although refiners tend to get weak at the end of the summer driving season and right before they switch to winter-grade gasoline, these two stocks have seriously bullish setups that are difficult to ignore.
Have a look at the refiners. They might be ready to explode on the back of a happily disappointing East Coast storm.