The Time for Refiners Is Nigh

Even being able to forecast certain trends is no guarantee of good results in this market. The refinery sector was such a case in point -- everything indicated the refiners would fare well even in the recent economic turndown, but it didn't quite work out that way. Let me try to explain why these stocks are here and assess their outlook for the future.

In the Hummer-crazed world of excess we saw in the middle of this decade, the refineries experienced the most positive business cycle they could have dreamed of. Being vigilant against creating oversupply, refiners in this country increased capacity at a very slow rate for much of the decade, putting pressure (and premiums) into gasoline production at various stages of the yearly cycle.

Cracks, which are a measure of the applicable price between any refined product and the price of the raw material required to make that product (crude oil), are a gross but useful measure of the "margins" for refining a particular product at any one time. The crack value, measured in dollars, gives a good indication of the demand for refined products and therefore an excellent idea of the profit margins the refining companies will enjoy. In the last several years, particularly in the summer, the refinery companies enjoyed themselves to excess:

Weekly Cracks -- Gasoline

Click here for larger image.

Source: CQG

That's the historical crack chart for gasoline, by far the most important refined product these companies produce. Refiners enjoyed margins of well over $15 in the summer, sometimes delivering well over $30 in very good years.

All this good news ended abruptly as oil began spiking upward, particularly after the start of 2008. Refining margins, represented by crack spreads, began to collapse. Even for the summer driving season in 2008, cracks rarely exceeded $10, a paltry return for the firms in what has been the most profitable time of year.

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At the time of publication, Dicker was long Tesoro, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.