NEW YORK (TheStreet) -- Imagine for a moment, that you run a company that must sell its goods at a lower price point, yet simultaneously must pay more to produce this good. This seems like a reasonable cause to send a company's shares downward, which is exactly what has occurred with refinery stocks.
The rally in crude oil, coupled with muted prices at the local gas station, has created a troublesome environment for oil refining companies. Investors, though, have recently savored the gift of a run-up in oil prices; and consumers have welcomed the gradual slide in prices charged at the pump. As appreciated as this pairing is for consumers and investors, it's terrible for the refiners who must pay those higher energy input costs and receive the lower retail pump revenue.
We believe this trend is due to reverse shortly.
During this time, crude oil, gasoline
Prices at the local gas station have begun to lose their high correlation to crude oil over the recent past. Gasoline has made a series of lower price highs since the summer of 2011, while crude hit a new high in August. Fortunately, companies like GasBuddy.com, have made pump prices readily available for all 50 states and most major cities.
Viewers can quickly see the price charts showing retail gasoline prices that have not tracked alongside prices of crude oil recently. Instead they have, on balance, been declining. Now, this is great news for U.S. consumers and their wallets, but not for companies such as Valero
Lastly, the complications facing British Petroleum
Fortunately for companies like Hess
All of these points ultimately create an improving environment for oil refinery stocks, and a potential buy point. When these companies see a drop in their input costs compared to the prices they can charge through a retail outlet, their margins should swell. This would reward stockholders. At the very least, the primary driver for the substantial declines in the refinery sector should be waning.
Historically, situations like this one have shown refinery stocks to at least perform well compared to the broad market. What does this mean?
If an investor is bearish on stocks as a whole and looking for short-sell candidates, refining stocks are probably not ideal. Also, investors looking to create a neutral portfolio could buy refining stocks and sell short a broad market ETF, like the SPDR S&P 500 ETF Trust
There are a number of ways to take advantage of the changes coming to the refining sector, and well-informed investors should be rewarded for identifying these developments. Many of the oil-refining companies have been shunned by portfolio managers and general investors as a whole, which has helped to push prices lower by up to 33%. Now may be the time to view this decline as a gift, rather than the start of a new bear market within the sector.
At the time of publication, Andrew McCormick, MKC Global Investments, LLC and the MKC Global Fund, LP are long December Mini Russell 2000 futures.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
- Oil, Gas, & Consumable Fuels
- Basic Materials Industry
- gasoline prices