Refining News Will Stay Strong
Overweight
Refining related stocks have surged in recent weeks, and a key issue is whether it is time to lock in profits now that refining margins have spiked higher. Not yet. The weekly oil inventory report showed yet another drop to new lows in finished product supplies. The ratio of crude oil to finished oil inventories has jumped to a new high, underscoring that the recent surge in refining margins is not in danger of a sudden reversal. Importantly, driving season is rapidly approaching, which means refiners will need to operate at full tilt in order to ensure adequate supplies for summer. This should fully expose the industry’s high degree of operating leverage, and we expect analysts to begin scrambling to revise up earnings estimates. Meanwhile, the secular supports remain intact, as there is no widespread evidence of demand destruction or capacity growth (as previously noted). The upshot is that returns on equity should remain much higher than the historical average, supporting share price outperformance. Stay overweight.
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