Refiners Attractive as Margins Decimated

The endless bid in oil has been ruthless to consumers who have to buy gas for their cars -- but it's been equally ruthless to the refiners who make gas for those cars. I'm beginning to believe that it's gone too far and the refining stocks are due for a big recovery here.

The endless bid is what I have been calling the desire of investors to have exposure to commodities, particularly oil. When investors want oil, they think of the crude barrel and not the products that are made from the refining of crude. The price of the crude barrel has been influenced unduly by investment in commodity indices and oil ETFs that track crude oil futures.

The products that have real value -- the oil that is burned for fuel and the gasoline that is burned by our cars -- have been overlooked as investments. Hence, those products have been sold relatively cheaply for the last several years, at least compared to crude oil. This may be hard to believe for drivers who paid $5 a gallon for gas last summer and are looking at $3 a gallon for gas this summer.

The relationship between gasoline and the crude barrel it is refined from is called the "crack" spread. In summer months, when gasoline demand is at its highest, the average crack spread from 2004-2007 ranged anywhere from $25 to $45. Last year, with oil topping $147 a barrel, the summer crack rarely broke $15. This year, the August crack is trading just north of $8.