Crack spreads moving up…

We’re not too sure about the strength of the US recovery mentioned in the article though (for one reason, see here). But the rest is pretty interesting.

Why Refining Stocks Are Headed Higher
Marc Azar

Most of the refining industry stocks have been hammered in the last two years since the Great Recession started, and they didn’t even participate in this past year’s way up, in which the S&P (SPY) rose around 60%. Valero (VLO), for example, is down more than 70% from its peak and Tesoro (TSO) is down 75%. However, we feel that all this is about to change and that these stocks are about to go much higher. Why?

The first reason is the seasonality of the refining business. We are now entering the strongest period in which demand for gasoline picks up through the summer. As more and more people start traveling, they consume more gas and the refiners can start raising their prices. You can see from the crack spread chart below that this started happening already, as the spread has doubled from 6 to 12 in the last few weeks.

The second reason is that oil is breaking out to new highs. On Friday, Nymex crude closed at $81.5. The global demand for oil is still strong, especially in India and China. China has also confirmed that it is planning to keep buying commodities, at least for the time being. The OPEC countries are also supporting higher oil prices cause they want to lift their economies and avoid any problems for their own people.

The third and more important reason is that the recovery in the US is getting stronger and the consumer has started spending more and more. For the first time on Friday, consumer debt has started rising again. That means that consumers are now willing to put more debt on their credit cards and they will definitely be spending more money on gas. It might be bad for the future (since our problems originated because of more debt!) but for now the government wants to see people reloading their credit cards.

In the last few days, many of the refining stocks rose substantially and if we get a pullback in the coming days, we’ll definitely add to our positions. Our two favorite stocks are VLO and TSO:

Disclosure: Author is long TSO call options