NEW YORK ( TheStreet) -- Are crack spreads cracking?
On Monday and Tuesday all the action in the oil refiner stock sector was about the flooding down south, but by Wednesday, more fundamental fears about the historically high crack spreads that have buffered the refiner outlook bubbled to the surface.
"The scale of the floods is no joke, but aside from a few specific flood cases, the volatility in refiner stocks is commodity-driven now, and there is violence in the swings," said Dahlman Rose analyst Sam Margolin.
The biggest loss among big refiner losses during the recent energy rout went to Alon USA Energy (ALJ), down more than 13%, and it is tied to Alon refining operation proximity to floodwaters. On Wednesday afternoon, Louisiana Governor Bobby Jindal said that Alon's Krotz Springs refinery will be shut if the Morganza spillway is opened to relieve flood pressure. At a press conference Jindal said opening the spillway is a "necessary step," which Louisiana official expect may happen by Saturday. Alon shares were down another 3% on Thursday, taking this week's loss to 18%.On the other hand, the flooding issue could provide a short-term opportunity to European-based refiners or refiners in the U.S. Northeast far from flood waters. Still, analysts were more concerned about what happens after the flood waters recede, and whether the crack spreads could, in effect, crack as demand weakens and refined petroleum product demand slumps, leaving the entire refiner stock sector vulnerable after its massive 2011 rally. The crack spread is the difference in what a refiner has to pay for crude oil and the profit it can make from refining the crude into petroleum products including gasoline. This year, some refiners have also been supported by the historically wide spread between Brent crude and WTI crude, with the lower priced WTI light, sweet crude serving as another reason for mid-continent-based U.S. refiners to rally. The crack spread, which had started Wednesday at a historically high level of $32, plummeted through the afternoon and ended trading at $29.86. On Thursday, the crack spread was down another 7% and below $28.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV