Oil refiners are in trouble.
Shares of companies like Valero Energy (VLO) and Tesoro (TSO) continue to fall, despite rising oil prices. And recent news out of Iran suggests the pain will continue for these companies…
[ad#Google Adsense 336×280-IA]Longtime Growth Stock Wire readers are familiar with the headwinds facing refiners today.
In March, my colleague Matt Badiali told you to be wary of them.
His reasoning was simple: When the U.S. began to export crude oil, existing oil supplies began to fall.
That caused the price of U.S. crude oil – known as “West Texas Intermediate” crude, or “WTI” – to move in line with European oil (known as “Brent” crude).
That meant U.S. refiners couldn’t buy cheap U.S. crude and profitably export it as a refined product anymore, which let European refiners compete.
And the news just got worse for U.S. refiners…
In January, the U.S. and the European Union lifted sanctions against Iran. As a result, Iran can trade with the world markets without restrictions.
The Middle Eastern country plans to reduce its gasoline imports by expanding its refinery system. Specifically, it will grow its refining capacity by more than 70% within the next four years. It will build five new plants to increase its capacity from 1.9 million barrels to 3.2 million per day by 2020.
The first and largest of the new refineries will start producing by next March. This will provide additional competition – and lower profits – for U.S. refiners.
Iran’s return to prominence in the world oil market has been negative for Gulf Coast refiner Valero.
We recommended shares in the Stansberry Resource Report back in October 2014 as a way to profit from falling oil prices. We stopped out for a gain of nearly 50% in January, about the same time as the world officially lifted sanctions against Iran. You can see below how Valero has fared since…
But that wasn’t the only reason shares fell…
In early 2015, the price of WTI crude oil reached a 25% discount to Brent crude. Valero was able to buy cheaper WTI crude, refine it slightly, and export it for a big profit. When oil prices peaked in late 2014, Valero’s profit margins more than doubled – from 6.1% to 12.4% – the same quarter a year later.
But in December – a month before Iran’s sanctions were lifted – the U.S. lifted the ban on exporting crude oil. Exports became much less profitable as overseas refiners were able to pay about the same prices as Valero.
The two events hit refiners almost immediately.
Shares of Valero and other refiners have gotten cheaper, but they aren’t buys yet. We’ve had some time to digest U.S. crude-oil exports, but we still need to see the world come into balance with the new capacity coming online. We’re watching the sector carefully.
In the meantime, as oil prices continue to rise, we’re growing bullish on large-cap, high-quality oil producers. We just recommended one of these investments to our Stansberry Resource Report subscribers earlier this month. If you want to put money to work in the oil sector right now, that’s one place you should be looking.
Good investing,
Brian Weepie
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Source: Growth Stock Wire