NEW YORK (Real Money) -- Not enough pipe. Not enough refinery space. Too much oil. That's the story of the Permian oil field, where production has increased as astounding 400,000 barrels a day in the last two years.
That's caused a discount to the already-discounted West Texas Intermediate price. How big is it? Right now, West Texas is selling for a discount of $10 to Brent -- $98 vs. $108 -- and then Permian is selling at an additional $8 decline to the $98 price as Permian producers duke it out for pipeline space and take discounts galore to do so.
That's behind the remarkable resurgence of the refiners as the ones on the Gulf are buying $90 oil and then selling that refined product for the world price, making a killing in the process. It's this glut of Permian oil that's causing the margins to expand at a breathtaking pace and it is unlikely to reverse itself any time soon.
Dan Dicker and I had a good sit down about the price differential in a video, but what you need to know is that, according to RBN Energy, the source I use for all things energy in this country, the discount is not going to go away any time soon. In fact, it should get worse before it gets better because the oil is being pumped in increasing amounts, and new pipe that can help alleviate the space constraints won't be available until at least June. That means three more months of wide spreads and three more months of outsize profits for Alon USA Energy (ALJ) , Marathon Petroleum (MPC) - Get Marathon Petroleum Corporation (MPC) Report and HollyFrontier (HFC) - Get HollyFrontier Corporation (HFC) Report, all of whom reside at the other end of the pipe from the Permian.
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I am not a big fan of the refiners because they are so hard to gauge. What happens when not one, but two new pipes open in June? Will the differential close and all of the momentum money pour out of these stocks? Will the pipes work right all at once? Is the oil increasing at such a pace that it will quickly overwhelm these two new pipelines?
To me, it will be a game of chicken come June.
But there is no doubt in my mind that the estimates for the refiners are too low because of this Permian discount to the discount. These refiners all report in the first week of May. I bet they run right into them as more and more people figure out the discount. But then you would have to jump ship when they report, because they will have to say that the two new pipes that open in June could eliminate the discount to the discount.
Sounds like a good trade on any weakness that comes from the price of West Texas crude stabilizing here, simply because it isn't emblematic of either the real price they are getting in the Permian or the world price sent in Brent. But it is emblematic of windfall profits for the refiners as pipe pace is tight, no new refineries have come on since 1976 and we just keep finding more and more oil in the Permian every day.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.
Editor's Note: This article was originally published at 7:23 a.m. EST on Real Money on March 13.