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Refining Stocks: Big Pop Coming

NEW YORK (TheStreet) -- Refining. It's the only sector in energy or elsewhere that is not only immune to rising commodity costs, but is poised to benefit from them.

For dedicated refining stocks, or integrated energy stocks with exposure to refining, that's a tremendous advantage, especially as we start heading into first-quarter earnings reports. In a market that has been grinding higher and testing our ability to find value, these stocks represent the best opportunities in energy right now.

As our "Teflon" market grinds higher, the one big analyst concern for stocks has been margin compression from the monster moves in all commodities -- in corn, beans, cotton and copper, but particularly oil.

One place that will actually benefit from higher oil prices is obviously with the large integrated oil stocks like Exxon (XOM), Chevron (CVX) and Conoco-Phillips (COP), but less obviously with the refining stocks like Valero (VLO), Tesoro (TSO) and Marathon (MRO).

Immune From Inflation - Refiners: Dicker

One enormous reason refiners are doing especially well is because of the continuing disconnect between West Texas Intermediate (WTI) crude, traded at the NYMEX and Brent crude traded at the Intercontinental Exchange (ICE).

It's a complex relationship and difficult to explain in a short column, but an easy way to think of this is by imagining that the input costs of a refinery is represented by the WTI price, while the price that they can charge at the pump is much better represented by the Brent price. Therefore, the further that the Brent price steams away from the WTI price, the better the margins and profits will be for the refiners.

This spread has been at a historical premium of Brent crude over WTI for the last several months, and what is more spectacular, has begun increasing again in the last several days, now close to $14 dollars. That's about as close a license to steal as the refiners can get, and they absolutely mint money at a relationship like this.

The refiners I mentioned previously have run substantially already on the basis of this continuing disconnect, but there may be one more that might just be the best: Frontier (FTO). Its refining assets in the "mid-con" region of the U.S. are the best poised to maximize the margins from the WTI/Brent spread. Its soon-to-be merger partner Holly (HO) is the same trade in a slightly different form.

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