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.
Enterprise Products Partners L.P.
) - 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.
) - among the largest refiners in the U.S. - dropped the most in a
year, tumbling 4.2%.
Valero Energy Corp.
) shares fell 8.3%, while
Marathon Petroleum Corp.
) 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
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
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.
Calumet Specialty Products Partners L.P.
). While Sprague Resources sports a Zacks Rank #1 (Strong Buy),
Calumet Specialty carries a Zacks Rank #2 (Buy).
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ENTERPRISE PROD (EPD): Free Stock Analysis
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