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The oil refinery stocks are starting to get interesting. The EIA reported last week that gasoline inventories are at the lowest levels ever in terms of days' supply. The EIA reported that there are only 20 days of gasoline inventory available, which may translate into a rise in gasoline prices.

Gas prices have not rallied yet on this news, and traders seem much more concerned about the effects of an economic slowdown on gasoline prices than about the evidence that gas supplies are low.

Light Crude vs. Gasoline

Click here for larger image.

If gas prices start to rise from this level faster than oil prices, then we should see a widening in the "crack spread." The crack spread is the spread between the price of oil and the price of gasoline. If the crack spread widens, refinery profits will rise. We saw a widening of the crack spread from January through May of this year, which resulted in a strong rally for the refinery stocks. The exceptionally low gasoline inventories may lead to another widening of the spread and a rally in the refinery names into the back half of the year.

There are several pure-play refiners in the space, which include

Valero Energy

(VLO) - Get Free Report


Tesoro Energy



Western Refining



All three of these stocks look attractive at these levels, but if we had to pick one name in the group, we would take a look at Valero Energy, which is the largest and best-known name in the sector.

VLO broke the uptrend line in early July, as gasoline prices fell and the crack spread contracted. The trend break has led to a consolidation over the last two months, but now the stock is forming a small, bullish double-bottom formation. The double-bottom suggests the bulls are trying to take back control of the stock. A successful breakout from this reversal pattern would hint at a resumption of the primary uptrend.

The primary catalyst for this group is not the price of oil, but the price of gasoline relative to the price of oil. If the crack spread widens in the coming days and weeks, then the refinery stocks should see a resurgence and retest the highs set in June. It's still early, but the exceptionally low gasoline inventories may lead to gasoline prices moving up faster than oil prices. If this happens, then traders will want exposure to this group.

At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.