Refiners Continue to Get Destroyed

Ouch! The sector is really suffering - I have been an avid investor in refiners over the years as they are usually good for a 20-40% type of gain in a 6-9 week period, 2-3x a year, but not this year. To be blunt I have been scratching my heads for months on end wondering why gasoline is not close to $4, once crude oil got over $85... I am still confused; I guess the idea is consumer demand will simply fall off a cliff if pump prices went to where they should be to reflect >$100 crude. But the margins of these refining companies simply are crushed as crude (the input) increases and they are not passing along all the cost to consumers... people are complaining about $3.30 gas but with crude nearing $110, I'd of expected $4.50 type of gas to maintain margins. Something is amiss, and late winter/early spring is usually the time to buy refiners, but the rules are being broken this year. This is a conundrum - simply put crude oil is a world commodity being driven by demand in other countries along with rampant speculation prodded by Fed flooding the world with worthless dollars (inflation) ... but the gasoline products are local to the US economy so demand is weakening as the US consumer weakens. Talk about a rock and a hard place. Another example of why investing in companies reliant to the US economy is simply a fools game at this point.

I'll put up one chart - my favorite Frontier Oil (FTO), but it represents the whole group - Valero (VLO), Tesoro (TSO), Holly Corp (HOC) - all are down 6-9% today. Today's culprits appear to be high inventories ....

• Shares of oil refining companies fell Wednesday as oil prices remained high and a government report showed a larger-than-expected rise in inventories.
• Refiners have been paying record prices for oil, but have not been able to lift the prices of finished products, like gasoline, enough to offset those costs. That's because consumers have been holding back on unneccessary travel spending amid high food and energy costs, declining home values and debt burdens. Those trends have pressured refining margins since the fall.
• The Energy Department said that gasoline supplies rose by 1.7 million barrels, well above the expected 300,000 barrel increase. Higher inventories indicate weaker demand and pricing, though inventories are likely to fall as the spring and summer travel seasons approach.

....and a downgrade in the sector.

• Caris & Co downgraded U.S. refiners, including Valero Energy Corp (VLO), saying high oil price was expected to take its toll on demand, and raised its 2008 oil price NYMEX WTI forecast to $95 a barrel from $72 a barrel.
• "With pump prices set to hit new record highs this summer on the back of record oil prices and an increased likelihood of recession, we forecast that domestic gasoline demand will contract this year," the brokerage said.
• The brokerage cut Frontier Oil Corp (FTO), Holly Corp (HOC), Sunoco Inc (SUN), and Tesoro Corp (TSO) to "below average" from "above average" and Valero Energy to "average" from "above average."

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