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Refiners: I Was Wrong!



July 27, 2008 – Comments (8) | RELATED TICKERS: VLO , ANDV , WNR

About 8 weeks ago, I was gloating about the upswing in refining stocks. At that point, I had already pocketed a nice profit due to my analysis of the crack spread (which was nearing $20 at the time of writing, up from lows around $7 last November), about which I had written a week earlier. With the driving season about to start, I figured the spread could only go up, and with it the stock price of pure refiners.

Boy, was I wrong. This week's fuel inventory report says it all: gasoline inventory up a lot more than expected, demand for gasoline 2.4% lower than last year in the same period, and refiners running at only 87.1% of capacity. Especially this last number is not good news for refiner bulls: this time of the year, it should be around 92%. Conclusion: even with refiners producing less than they should, inventories go up. No wonder that spreads have come down to about $11, and refiner stocks have dropped back to levels not seen since early 2005.

Other than a major hurricane taking aim at the Gulf, I don't think spreads will go up significantly. And with that, our chances of seeing the refiners rebound are slim.

There is an important lesson in this defeat: a relatively small drop in demand (so far ~2.5% relative to last year) during peak driving season, can make a humongous difference in the spread, and thus the refiner stock prices. I guess I should have expected that after seeing what Katrina did to the spread (a 10% drop in supply caused a $30 spike in spread)...

8 Comments – Post Your Own

#1) On July 27, 2008 at 7:13 PM, Tastylunch (28.62) wrote:

Thanks for the follow-up. I'm still learning the quirks their business works, it's nice to be able to read some adidtional insight.,

You have additional respect from me for owning up to your previous call. It's a trait I need to work on for myself.

Makes you wonder how long some of these refiners can last, They've been dragging for years now.

I read an anlayst opinion somewhere that Western (WNR) might be in real trouble cash wise. I'll see if I can find it later tonight...

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#2) On July 27, 2008 at 7:53 PM, Atleus (< 20) wrote:

My own follow-up: I was wrong about refiners as well.  Live and learn.

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#3) On July 28, 2008 at 12:00 AM, IBleedConcrete (29.62) wrote:

Will the last bull to capitulate please let me know so I can jump in?

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#4) On July 28, 2008 at 4:45 AM, AnomaLee (28.88) wrote:

Same here... I had similar thoughts as well. I figured gasoline futures would continue to go up despite inventories to maintain the spread. I figured crude inventories would continue dropping but...

Thankfully, I am playing a completely different thesis for my real porfolio, but if crude inventories remain low through this year and if economies around the world do rebound as many positive people expect it could be a VERY ugly year, next year.

By that time --- even if you are correct it won't matter if there's a shortage of petroleum products. This will eventually happen if demand destruction doesn't continue.

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#5) On August 01, 2008 at 8:06 PM, TheGarcipian (33.27) wrote:

Well, we can at least hope for a devestating hurricane to hit the Gulf this season, can't we?  ;-)

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#6) On August 04, 2008 at 7:26 PM, Fool (28.75) wrote:

I bought DK as was suggested as a Gem by o man was that a bad move. Their stock plunged 40% or so. I lost few hundred bucks. Right now this market is playing crazy games with investors. Can someone tell me why ACI dropped so much???

Times for like this I care less about market and use my own judgment...I bought some more ACI stocks...coal this cheap is ridicoulous.

leohaas...what do you think about SPF?

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#7) On August 05, 2008 at 4:43 PM, leohaas (29.99) wrote:


When oil goes down, so do all other energy-related commodities. That includes coal, so that is one of the reasons for ACI being down.

I have no opinion on SPF, other than that it is a a homebuilder (which I all avoid like the plague). I have no idea if they have bottomed, or if they are about to go belly-up. Check floridabuilder's blog to see if he is saying anything about SPF.

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#8) On August 11, 2008 at 3:53 PM, ratberto (95.74) wrote:

Actually, I don't think you did all that bad with it.  I went along with you, picking WNR, VLO and SUN.  WNR paid off quick and I got out, while SUN has taken a while, but now it's in the green.  VLO on the other hand hasn't been what it was cracked up to be.

What I did learn is that those rascals must be watched closely.  Not sure I would be able to discriminate amongst them in real life.


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