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3 Refiners to Profit From Higher Gasoline Prices, Demand

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With gasoline price inching upward in recent weeks, the cost to fill up over Memorial Day weekend this year will be dearer than it was a year ago, and the costliest it has been in more than four years. Agreed, gasoline prices usually rise during this time of the year as motorists take to the roads for summer travel but it seems that the fuel is starting to go up too much.

What's Behind High Prices at the Pump?

The rebound in crude has markedly raised the average price of U.S. gasoline, the most widely used petroleum product.

Gasoline prices are dependent on four factors: crude oil price, taxes, refining costs and marketing and distribution expenses. According to The Association for Convenience & Fuel Retailing, or NACS, crude oil costs account for about two-third of gasoline prices. Therefore, the worldwide demand and supply for crude oil is a major factor in deciding gasoline prices.

Per the U.S. Energy Information Administration (EIA), the U.S. weekly regular gasoline retail prices per gallon reached an average of $2.92 per gallon on May 21, more than 50 cents up from the same time last year. Importantly, this marked the highest average price going into the Memorial Day weekend – the traditional start of the summer driving season – since 2014.

The ongoing rally in crude prices have seen the U.S. Energy Department boost its summer average pump price projections to $2.90 per gallon. To put things in perspective, gasoline prices averaged $2.41 per gallon during April-September 2017.

Another reason for the spike in gasoline prices is the combination of high demand and low supply. At 233.9 million barrels, the stock of the most widely used petroleum product is now 2.5% below the year-earlier level, while demand recently hit an all-time high of 9.857 million barrels a day. Meanwhile, refineries are running at their maximum capacities and there is hardly any room for increasing supply.

High Gas Prices Unlikely to Deter Travel Demand

However, it seems that rising gasoline prices are not likely to stop people from taking to the highways for the Memorial Day holiday weekend. According to the American Automobile Association (AAA), about 36.6 million travelers are forecast to travel by road during the weekend, 5% more than last year. If the prediction is to be believed, then this Memorial Day weekend might be the busiest in more than a decade, with the highest travel volume since 2005. With the U.S. economy improving and consumer confidence remaining strong, more Americans are taking vacations. Further, consumers are benefitting from a much-improved job market and growing disposable income.

The expectation for record driving numbers is welcome news for U.S. refiners, who sell gasoline through independent retailers and their own units.

Three Refining Stocks to Buy

Among the handful of refiner and marketer of petroleum products in the U.S., we have shortlisted three of them that might fetch you outstanding returns. Each of our picks boast of a Zacks Rank of #1 (Strong Buy) or #2 (Buy), which justifies a company’s strong fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Delek US Holdings, Inc. (DK - Free Report) is a diversified downstream operator with interests in refining, wholesale distribution of refined products, and convenience retail. The company, a #1 Ranked stock, is capable of producing multiple summer grades of premium gasoline. In the last 60 days, seven earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 78% in the same period. company’s expected EPS growth rate for three to five years currently stands at 10%, comparing favorably with the industry's growth rate of 9.30%.

Par Pacific Holdings, Inc. (PARR - Free Report) is a diversified energy company with a portfolio of refining, infrastructure, retail as well as exploration and production assets. Among its downstream properties, this Zacks Rank #1 stock distributes gasoline through 128 retail outlets throughout Hawaii. The company has a Zacks Rank #2. In the last 60 days, two earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 2.4% in the same period.  

HollyFrontier Corporation (HFC - Free Report) is one of the largest independent refiners and marketers of petroleum products in the U.S. with wholesale gasoline making up more than 50% of its refined products sales. The company carries a Zacks Rank of 2. In the last 60 days, nine earnings estimates moved north, while just one moved south for the current year. The Zacks Consensus Estimate for earnings has moved 43% up in the same time frame.

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