Refiners Have Something Left in the Tank
Take advantage of near-term volatility to capitalize on long-term opportunity.
Refiners have been the lone bright spot in the energy sector during the past year, handily outperforming every other subsector. While oil prices have deteriorated, refining margins have improved, thanks to strength in gasoline margins due to key refinery outages and strong demand. We maintain a favorable view of the refiners, but do not think the shares are screaming buys. However, buying opportunities could present themselves, with seasonally weaker demand and the return of previously offline refineries likely to weigh on margins and share prices. Beyond the seasonal lull, we expect gasoline demand growth to continue, thanks to sustained low prices, while a potentially above-average maintenance season could keep product inventories in check. Differentials may also come under pressure as U.S. production declines, but we expect any narrowing will be temporary, as transportation costs should create discounts when production growth resumes. Favorable market conditions, earnings growth from refining and nonrefining projects, and sustainable yields combine to make refiners buys on the dips.
Gasoline Margins Likely to Remain a Tailwind
The combination of strong demand and refinery outages has boosted gasoline margins about 50% this year, offsetting narrower differentials and lifting overall benchmark margins. Once thought to have peaked, gasoline demand is approaching 2007's record highs, as lower prices and a strengthening economy are driving an increase in vehicle miles traveled (also approaching 2007 peak levels) and contributing to record vehicle sales (led by trucks and SUVs). Meanwhile, refinery outages, particularly in California, have kept inventories balanced despite high utilization rates.
Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.