WINDERMERE, Fla. (Stockpickr) -- Refining stocks are setting up for some big earnings beats and potentially much higher stock prices.
Clearly, the refining stocks are sitting in the sweet spot and are poised to benefit off of skyrocketing oil prices. But that's not the only real reason to love this sector. The refining stocks are also positioned to see major profit margin gains due to the record spread in crude oil futures contracts.
The premium spread between North Sea Brent crude oil and West Texas Intermediate, or WTI, crude widened for the sixth day Thursday as Brent crude continues to trade near record levels. Brent crude for May delivery is now being quoted at about $123.89 a barrel on London's ICE Futures Europe exchange, a $16.22-a-barrel premium over WTI futures for May, which are changing hands at about $107.67 a barrel on the New York Mercantile Exchange.
Market players need to understand that the longer this spread stays at a massive premium, the higher the probability is for the refining sector to capture huge profits in the coming quarters. As Daniel Dicker explained in a recent column, think of the WTI price as representing the refiners' input costs and the Brent price as representing the price charged at the pump.The reason the spread is so out of whack is because Brent crude oil is mainly produced in troubled regions of the world such as the Middle East and North Africa. Due to all of the current unrest in these regions, the commodities market is slapping a giant "fear premium" on Brent crude oil. The more unrest we get out of the Middle East and the higher that "fear premium" is going to go. Related: Beaten-Down Tech Stocks Set to Bounce The other major catalyst for higher refining stock prices is the exploding crack spread. The crack spread is a term used in the oil industry and futures trading for the differential between the price of crude oil and petroleum products extracted form it. In other terms, this is the profit margin that a company which specializes in refining oil can make by "cracking" crude oil down into gasoline for sale to consumers. Guess where that crack spread is trading at right now? U.S. gasoline crack spread against crude oil hit $29.20 a barrel on Wednesday, the widest level in almost four years. It's pulled back today to $27.83 after hitting that high, but the path of least resistance for the crack spread is higher. Now that you know about the fundamental trends that are driving the refining sector, let's take a look at some refining stocks that have big upside.
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