NEW YORK ( TheStreet) -- Oil prices could be headed as low as $75 a barrel in the near term due to excessive supply, but investors should consider the recent selloff in energy stocks as a buying opportunity.
The current landscape is a perfect storm for most bears. But refiners are quickly reaching a tipping point that suggests a bottom is near. Key pure-play names include Alon USA (ALJ) , HollyFrontier (HFC) and Valero (VLO) . Wall Street may have fallen out of love with these names, but that doesn't mean you should.
To understand why, let's examine the components that drive refinery profits.
Late 2013, and first quarter of 2014 (the latest numbers available), European and North American petroleum consumption is near or below the levels of 2010. A year marked as a slow climb out of the recession depths for some, but not all. The old Western economies counterbalance Asian demand growth, albeit as prices fall, expect demand to strengthen if history is our compass.
Because oil trades in dollars, a strengthening dollar requires more euros to buy the same amount of gas, diesel and crude oil. A weak Euro eelps explain in part why European demand is tempered lately, but the euro-dollar exchange rate average is about the same or more favorable for the euro now compared to 2010.
Looking back, the euro was stronger in 2012 than up to this point in 2014 on average. That leaves the last and most significant reason for falling crude, and why you want to take a closer look at refiners.