Fortunately for companies like Hess (HES) and Holly (HFC), most price relationships tend to revert to the mean. This will most likely remain true for the relationship between crude oil and gasoline prices. The price relationship between these two commodity markets is sitting right at the high of its 17-year range. In our experience, commodity spreads like this one, rarely remain at price extremes for very long. This means, in the near future, gasoline prices should rally strongly in relation to crude oil prices.
All of these points ultimately create an improving environment for oil refinery stocks, and a potential buy point. When these companies see a drop in their input costs compared to the prices they can charge through a retail outlet, their margins should swell. This would reward stockholders. At the very least, the primary driver for the substantial declines in the refinery sector should be waning.
Historically, situations like this one have shown refinery stocks to at least perform well compared to the broad market. What does this mean?
If an investor is bearish on stocks as a whole and looking for short-sell candidates, refining stocks are probably not ideal. Also, investors looking to create a neutral portfolio could buy refining stocks and sell short a broad market ETF, like the SPDR S&P 500 ETF Trust (SPY). This pairing says, "I like the improving conditions for refining companies, but I'm unsure about the broad stock market".There are a number of ways to take advantage of the changes coming to the refining sector, and well-informed investors should be rewarded for identifying these developments. Many of the oil-refining companies have been shunned by portfolio managers and general investors as a whole, which has helped to push prices lower by up to 33%. Now may be the time to view this decline as a gift, rather than the start of a new bear market within the sector.
At the time of publication, Andrew McCormick, MKC Global Investments, LLC and the MKC Global Fund, LP are long December Mini Russell 2000 futures. This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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