Energy Stock Picks for Summer

Energy stocks have taken it on the chin because of the BP oil leak. But shares of refiners could see unexpected gains this summer.
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) -- I've been looking for some "summer sizzler" stocks to take us through the next few months of heat and barbecues. This hasn't been easy, as the sector I cover, oil, hasn't done well lately. That said, I'm hoping that the refining group will provide a good opportunity in the next few months.

As the broader market has swooned, no sector has seen more selling than energy. The reason is obvious: the


oil leak in the Gulf of Mexico. As the horrible environmental impact of this disaster has become clearer, and as new attempts to staunch the follow have failed, investors have been fleeing energy stocks.

Bears have been in almost complete control of the broader market for a month, but they've really beaten up the energy stocks. It's as though the Macondo leak has made investors believe that no one will ever need oil again.

But it's


, and with it comes the summer driving season, always a benchmark period for the refining group. What's more, there are some differences this year that could provide a boost for dedicated refiners such as


(VLO) - Get Report




and integrated oil companies with deep exposure to refining such as


(MRO) - Get Report

and even


(CVX) - Get Report


The key metric to measuring how well the refiners can do is the margin that they are able to command for their finished product. These margins are represented by crack spreads, which measure the difference in price between crude oil and the refined products that are made from it: mostly gasoline and heating oil.

Several years ago, crack spreads for summertime gasoline were very robust, breaching $20 and often rising to $25 and even $30. For the last two years, however, the spreads have been miserable, rarely reaching double digits and sometimes in the off-season turning


. That's right: In the recent past refiners have


money producing gasoline. In short, refiners have been going through a nasty period in their business cycle.

I don't see that changing just yet. Crack spreads, which were showing some strength this spring, have recently collapsed again into single digits, which is barely a break-even point for the refiners.

Meanwhile, shares of refiners have taken it on the chin along with the broader energy sector in the wake of the BP disaster. Valero, which was making a valiant recovery from its lifetime lows in the midteens seems to have stalled again at less than $20. Tesoro, on a similar trajectory, has also languished at $12.

But two things give me hope and make me want to buy shares of refiners instead of selling them.

First, crude oil prices have come down significantly in the last month, and that has reduced retail prices of gasoline, which is now averaging $2.76 a gallon nationally.

This makes recession-conscious consumers looking for ways to spend leisure time more apt to choose domestic car travel to overseas trips. This could spur gasoline sales and give an unexpected boost to the refiners.

Second, my trader's instinct tells me that this sector has had so much bad news for so long that it is due for something to go right. There has been a cascade of shutdowns, fires and other maintenance issues, all in an industry where not one new refining unit has been built from scratch since the mid 1970s. Margins have been squeezed, workers have been fired and demand for refined products has cratered from even two years ago. Can anything else possibly go wrong? The trader in me tells me that it must be time to buy -- even one piece of good news for this sector should translate to a nice increase in share prices.

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At the time of publication, Dicker owned shares of Tesoro.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.