NEW YORK (
) -- The ridiculous and market-driven dislocation between crude oil and crude products, particularly gasoline, is squeezing the domestic refiners to the breaking point.
They're finally fighting back, and it should set up for a big increase in gasoline prices in the spring and a big increase in the price of refinery shares.
Trade Refining Stocks
, a regular tracker of gasoline prices, released its figures on Sunday, and a pattern over the last year wasn't broken. The average price of a gallon of gas went down more than 4 cents over the last two weeks, while the price of crude oil was up $5.75 a barrel, an increase of 8.7%.
Oil traders measure the differential between crude oil and the products that come from crude oil using "crack spreads." And this pattern of crude going up while gas prices go down, or a decrease in the crack spread, has been a recurring one in the last two years.
For this winter, gasoline cracks are reading in the low-single digits. The December gasoline crack has flattened to trade under $3, an incredibly low value even for the typical off-season for gas. But in recent history, these insanely tiny margins for refining are no longer unusual. During the past summer, in-season gasoline cracks traded barely in the low teens compared with "normal" summer cracks that traded at $25, $35 and even $45 in the past several years. In the late winter of 2008 and into the spring, we actually saw gasoline cracks trade negative.
Think about that for a moment and imagine what it means. Imagine you were a manufacturer of apple sauce and the cost of the apples was greater than what you could charge for the finished product. You'd not be in business for long.
That is what the refiners have faced this year. They've relied upon profits from distillate product sales to stay in the game for much of the year, but those margins have also cratered recently and they are now left with few options.
Of course, this has all been caused by the investment interest in crude oil, in what I have called the
that has taken oil outside of any fundamental pricing. Because of a lack of investor interest, finished products like gas and heating oil, also transparently traded and priced on open markets have, unlike crude, remained tethered to supply and demand -- both of which look bleak and are keeping refined product prices low.
It's nuts, but here we are, engaged in an oil market trading close to $75 and refinery companies going quickly broke because of it. It's counterintuitive to imagine oil companies going south because of high oil prices, right?
But refiners are acting like Peter Finch in
-- they're mad as hell and not going to take it any more. They have begun fighting back in the only way they can -- they've begun to shut down refineries. Both
have announced recent shutdowns, Sunoco with its Eagle Point refinery in New Jersey and Valero with its Aruba plant. I believe other refiners will soon follow suit.
They're not looking to create gasoline shortages and lines at the pumps. They're using one of the only tools left to try to survive. But once you shut down refineries, it takes a lot to start them up again. There will be consequences to this dire response from the domestic refiners.
You can bet on seeing a fundamental shortage of gasoline to begin to squeeze prices of gas and heating oil higher. How much higher? A more "traditional" crack spread would price gasoline about 50 cents higher a gallon than it's selling for now. A real shortage could easily send that margin to squeeze levels of perhaps a dollar or a dollar and a half per gallon higher.
And that will make refinery shares as they are priced right now look extremely cheap.
Right now, the fundamental picture of the dedicated refiners like Valero and
and larger consolidated oil companies with big exposure to refining like
Earnings reports for the quarter for these companies because of these tiny margins are sure to be dismal when they report at the end of this month. But that timing seems to me to set up a great opportunity to get into these shares.
The refiners are fighting back from the crazy disconnect between a capital market crude price and a retail market gas price. It'll take some time, but I expect them to win the war and survive. This desperate strategy should also make for a unique and amazing opportunity to make money in their shares.
At the time of publication, Dicker owned Tesoro and Chevron.
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.