Oil refining stocks ended mostly in the black Thursday after steep losses in previous sessions. Refiners took a beating following the ruling by the Obama administration that it was relaxing a four-decade ban on crude oil exports.
What does the ruling mean?
Without going into the intricacies, it basically allows U.S. oil producers to export crude – which they are banned from doing now – following minimal processing. Light crude oil, or condensate, as it is known after being treated, can now be shipped to foreign buyers.
Late Tuesday, the U.S. Department of Commerce's Bureau of Industry and Security updated its age-old definition of 'crude oil' and granted approval to two U.S. firms – Pioneer Natural Resources Co. (PXD - Free Report) and Enterprise Products Partners L.P. (EPD - Free Report) – to facilitate exports of condensate.
The ruling immediately sent down shares of refiners as it was construed as an attempt by the Obama administration to ease restrictions on a 40-year ban on crude exports. Phillips 66 (PSX - Free Report) – among the largest refiners in the U.S. – dropped the most in a year, tumbling 4.2%. Valero Energy Corp. (VLO - Free Report) shares fell 8.3%, while Marathon Petroleum Corp. (MPC - Free Report) plunged lost 6.3%, for their biggest losses since Nov 2011.
Perceived Impact on Refiners
Speculation has been rife that the relaxation of export norms will open the floodgates to crude shipments abroad, which are currently banned as per rules imposed in the aftermath of the 1973 Arab oil embargo. This is expected to eat upon the domestic crude supply glut – fueled by the U.S. fracking revolution – and result in oil price increase. Eventually, the domestic and international prices would converge and refinery margins will deteriorate. The U.S. companies – which are not allowed to export oil but can ship refined products such as gasoline and diesel – will lose the price advantage it has been enjoying of late.
The Bottom Line: No Cause for Panic
Notwithstanding the selling pressure on the refiners, things do not appear to be that drastic. The following points explain why.
Firstly, at this point of time, a larger rollback of the export ban looks unlikely and there is little chance of a blanket nod for oil exports. Therefore, the sector’s steep selloff looks like an overreaction.
Secondly, refiners are more inclined toward processing the cheaper heavy grade oil as compared to the costlier and harder-to-transport lighter one (like condensate) in a bid to boost profits. With most of their capacity tailor-made for heavy crude, the companies won’t mind a small amount of condensate go toward exports.
Finally, a spike in domestic production and ballooning crude inventories would still keep the refiners’ input costs reasonably lower.
As a result, most U.S. refiners were able to claw back and recover some of Wednesday’s losses yesterday.
Our preferred picks in this group are Sprague Resources L.P. (SRLP - Free Report) and Calumet Specialty Products Partners L.P. (CLMT - Free Report) . While Sprague Resources sports a Zacks Rank #1 (Strong Buy), Calumet Specialty carries a Zacks Rank #2 (Buy).