Watching History in the Making: Record Oil Prices

You are watching history and you don’t even know it.

Nearly daily, crude oil and gasoline are hitting record highs. This is unchartered territory and hasn’t been seen in the economy for about 30 years.

How long will it sustain itself? When will the sell-off occur? How far will it fall when it finally sells off?

Who knows?

The momentum and the speculators are in the crude market now and it can run far higher than most people believe. That’s the thing with momentum- once it gets rolling it’s hard to stop.

I’ve talked in the past about how to benefit from the high crude prices- such as buying the explorers. But what about the refiners?

They are getting crushed as crude rises to these levels. They have to buy oil on the open market to refine into gasoline and even though gas prices are rising- they are not keeping up with crude prices. Which means the refiners’ margins are getting squeezed.

A few weeks ago, Valero said that it was slowing refining at its Midwest refinery because it “wouldn’t lose money for its shareholders.” What is it doing now? It’s losing money.

Refiners Are Switching to Diesel

The WSJ recently talked about how refiners were switching to refining more diesel fuel because diesel prices are higher and their margins are greater. This will also put a squeeze on regular gasoline inventories- which should push prices higher for gasoline.

That’s the point that is being lost here. As crude goes to these levels and the refiners continue to lose money- they will simply slow refining until gasoline prices rise enough for them to make money.

The refining stocks have been crushed in recent weeks. Several of them posted awful first quarter earnings- seeing earnings drop as much as 90%. The second quarter could be worse.

But the refiners could be a buying opportunity shortly. The squeeze on margins isn’t going to last forever. The rise in crude will moderate and prices will come down. But it’s likely gasoline prices will not- simply because the refiners will control supply to keep prices elevated so they can make some money. As the refining stocks get cheaper- they’ll become pretty juicy.

The largest free-standing refiner in America? Valero (VLO).

As crude prices rise and gasoline spikes, don’t just get mad…make money.

[The author of this article doesn’t own Valero. Not yet anyway.]