As discussed in the past, refineries generally trade on the crack spread, essentially the variance between crude oil prices and refined gasoline prices. This spread has collapsed the past month, and the stock of most of the refiners have followed suit. This is a very cyclical dynamic, and makes for a few good trades a year. While I cannot call this a bottom, I like buying merchandise at 25% off sales.
The other refiner I own is Frontier Oil (FTO), which I have been tentatively building a position in as well (it has the best profitability due to its unique locations but still is affected to some degree by the crack spread degradation). Frontier Oil has dropped down to only its 50 day moving average so it could be vulnerable to more pullback.
There are not positions that will turn on a dime, but I expect by January 2008 we should see some return to normalcy in the crack spread. The stocks are now reflecting a lot of the bad news, and I expect quite poor earnings when these companies report, but the market is a forward looking mechanism so I begin rebuilding these positions here and re-assess from there.
Again these refiners, like coal stocks, are not like the other 85% of positions I hold which are really long term pure secular upswing type of stocks. These I put off to the side and trade them either on severe weakness (refining right now) or breakouts (coal right now) - but I will take severe profits in these groups when the time comes due to their more cyclical stock trading nature versus everything else I own. With that said, with no new refinery built in the US in 30 years and burgeoning energy demand worldwide, they aren't bad sectors to be in bed with either.
Long Frontier Oil and Western Refining in fund; no personal positions.
