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<\/a><\/p>\nIf this group could turn around, the upside could be material.\u00a0 I\u2019d love to time that turn.<\/p>\n
The problem is–I\u2019m not seeing it yet.<\/p>\n
The entire refining complex got a nice kick on Tuesday from the Philadelphia news.\u00a0 Kudos if you were able to catch that.<\/p>\n
Some will benefit more than others.\u00a0 PBF Energy (PBF-NYSE) <\/strong><\/span>has 34% of their capacity on the northern East Coast, so I would see them as a beneficiary.<\/p>\n But taking a step back, I just don\u2019t see the refiners outperforming until the Market is confident oil product demand is back on track, and that means a jumpstart to the global economy.<\/p>\n Second, we are just not short of refining capacity.<\/p>\n While the loss of East Coast barrels will hurt, there is enough product capacity out there and so they will be made up with imports from the Gulf Coast or overseas.<\/p>\n Crack spreads have been weak for most of the year.\u00a0 While they briefly recovered here in Q2 19, they are back down to 5-year lows.<\/p>\n This is not just happening in the United States–Asian refining margins have also been weak.\u00a0 Singapore gasoline margins have been close to break-even.\u00a0 On average for the year they are the lowest since 2008.\u00a0 Chinese oil demand has been declining and Chinese refiners are responding by exporting products.<\/p>\n Meanwhile in the United States product inventories are mixed. Gasoline inventories are above the 5-year average while distillates are dropping below.<\/p>\n That isn\u2019t really a bad picture–it\u2019s just not a great one.<\/p>\n You need to believe in one of two things to be willing to bet on the refiners.<\/p>\n Refiners are not safe havens.\u00a0 They are extremely<\/em> susceptible to economic swings.\u00a0 Whenever I get the urge to buy a refiner I go back and remind myself of what happened in 2008.<\/p>\n Now I realize that 2008 was a once in a lifetime event (let\u2019s hope!) but its still worthwhile to review just how bad the refiners did in that recession.<\/p>\n Looking at Valero (VLO-NYSE)<\/strong>\u00a0<\/span>–the biggest and \u201csafest\u201d of all the refiner names–the stock dropped from $50 to $10.<\/p>\n Overall they underperformed a terrible overall market by a significant margin.\u00a0 On average the names fell nearly 80% top to bottom.<\/p>\n The recovery was even worse.\u00a0 \u00a0It took nearly two years after the broad market for the refiners to begin to recover.<\/p>\n The inescapable conclusion is that in a slowing economy a bet on refiners is a dangerous one. Before I can buy a refiner for anything more than a quick trade, I must have confidence in the economy.<\/p>\n I\u2019m not feeling enough love there right now.<\/p>\n If you are looking for a reason to buy refiners, you don\u2019t have to look any further than IMO 2020.<\/p>\n Last summer the prospects of IMO 2020 sent the refiners up to their highs.\u00a0 Some of that has come off shine has come off since then but IMO will still have an impact.<\/p>\n Investors are still looking at a potentially major disruption to the crude products market.\u00a0 There will be increases to crude distillate demand, but \u00a0how much though is still a matter of opinion.<\/p>\n As a quick recap, the shipping industry has historically used high-sulphur fuel oil to run their ships.\u00a0 This isn\u2019t very good for the environment and the new UN mandated sulphur cap of 0.5% is intended to rectify that.<\/p>\n IMO 2020 means that ships will be required to either switch to a low-sulphur fuel or use scrubbers on the ships to remove the sulphur from the exhaust.<\/p>\n At this point we know where the scrubber number is going to be;\u00a0 estimating the required distillate demand from ships isn\u2019t too difficult.<\/p>\n RBC Capital Markets put out a note earlier this year estimating that 860 mbbl<\/span>\/d of additional distillates would be required by refiners through higher utilization rates.<\/p>\n They went on to say that higher utilization would require better margins.\u00a0 Refiners respond to price, and we need to see crack spreads increase to spur the supply.<\/p>\n The more complex refiners (mostly located in the United States and run by the big players like Valero (VLO)<\/strong> and Marathon Petroleum (MPC)<\/strong><\/span>) will incur extra benefits.\u00a0 They have cokers and hydro-crackers that can take advantage of what is expected to be wider heavy oil spreads to produce gasoline and distillate products.<\/p>\n That is the bull-case in a nutshell.<\/p>\n When does IMO start to impact the market?<\/p>\n On their Q1 call, Valero said they expected effects on the high-sulphur fuel side to start to appear in late-September, with impacts on distillates occurring in November-December.<\/p>\n If I had more evidence that oil demand (and the global economy) was strong, I would look at the impact of IMO 2020 and jump in for a trade.<\/p>\n But my question is, does it get lost in the shuffle?\u00a0 A slow economy could offset a lot of that upside.<\/p>\n Another factor to watch is the WTI-Brent spread, which has curiously \u00a0been narrowing<\/em>. \u00a0US refiners have the advantage of buying and refining WTI crude, which has trades at a discount to other crude types – particularly the Brent crude used by most European refiners.<\/p>\n The discounted WTI crude used by U.S. refiners boosts their margins as the refined products trade at similar prices across all regions regardless of the crude used to produce them<\/p>\n I\u2019ll keep watching spreads, the forward curve on distillates, and the spreads on heavy oil.\u00a0 Maybe these spreads will start to show me I\u2019m being too cautious.<\/p>\n I\u2019m willing to change my mind as the facts change.\u00a0 But until then I\u2019ll take the safer path and keep my money in my wallet.<\/p>\n EDITORS NOTE:<\/strong><\/span> I cover all kinds of energy stocks–including some solar stocks, which have been doing great lately.\u00a0 My latest solar pick is up $7\/share in the last 6 weeks. I think it’s going A LOT higher.\u00a0 Get the name and symbol on this stock:\u00a0Click here for quarterly access $ 149 per quarter (30 days no-questions refund)<\/a><\/strong><\/p>\n<\/a><\/p>\n<\/a><\/p>\n\n
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