Will Refiners Make a Comeback?

We’re into day two of the government shutdown, so selling action prevailed on Wall Street, pushing the indices down at today’s open. While the markets rebounded during the afternoon hours, five of 10 major sectors finished in the red at today’s close. The notable exceptions were Technology, Telecommunication Services, Utilities, Energy and Basic Materials.

Meanwhile, the U.S. dollar slipped for a second day in a row. Investors are now betting that the gridlock on Capitol Hill is going to weigh on the economy and further delay the Federal Reserve’s plans to taper asset purchases. Because the Fed’s money pumping program fosters an inflationary environment, this could affect the value of the dollar. So the dollar fell to an eight-month low against the Euro and the dollar index (which measures a basket of currencies against the buck) fell to its lowest level since February).

All the while, crude oil prices advanced, partly on the weaker dollar and partly on news from TransCanada Corp. that construction of the Keystone XL Pipeline is nearly complete. The completion of the pipeline means that the glut of crude that has been piling up in Cushing, Oklahoma, will soon be alleviated. That’s because the Keystone XL will connect Gulf Coast refiners to the oil sands of Canada—running through storage and distribution facilities in Cushing.

U.S. crude futures jumped to $104 per barrel while Brent crude prices rose to $109. However, the Brent-WTI spread narrowed to its smallest level in a week. This is the premium of global crude prices over U.S. oil (West Texas Intermediate), so it impacts refiners’ margins.

So before too long it may become more difficult for Midwest refiners to replicate the blowout earnings growth from previous years. This, coupled with increasing regulatory hurdles, means that you need to proceed with caution when investing in energy stocks. There still a handful of good buying opportunities out there, but you’ll need to look harder to find them.

As always, a good place to start is my Portfolio Grader stock screening tool, which assigns A- to F- letter grades to stocks based on their fundamental strength and risk-to-return ratio. I’ve done some of the work for you and have isolated three top Oil and Gas plays. Click here to see them.


Louis Navellier

Louis Navellier

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