Refining. It's the only sector in energy or elsewhere that is not only immune to rising commodity costs, but is poised to benefit from them.
For dedicated refining stocks, or integrated energy stocks with exposure to refining, that's a tremendous advantage, especially as we start heading into first-quarter earnings reports. In a market that has been grinding higher and testing our ability to find value, these stocks represent the best opportunities in energy right now.
As our "Teflon" market grinds higher, the one big analyst concern for stocks has been margin compression from the monster moves in all commodities - in corn, beans, cotton and copper, but particularly oil.
One place that will actually benefit from higher oil prices is obviously with the large integrated oil stocks like Exxon , Chevron and Conoco-Phillips , but less obviously with the refining stocks like Valero , Tesoro and Marathon .
Im One enormous reason refiners are doing especially well is because of the continuing disconnect between West Texas Intermediate (WTI) crude, traded at the NYMEX and Brent crude traded at the Intercontinental Exchange.
It's a complex relationship and difficult to explain in a short column, but an easy way to think of this is by imagining that the input costs of a refinery is represented by the WTI price, while the price that they can charge at the pump is much better represented by the Brent price. Therefore, the further that the Brent price steams away from the WTI price, the better the margins and profits will be for the refiners.
This spread has been at a historical premium of Brent crude over WTI for the last several months, and what is more spectacular, has begun increasing again in the last several days, now close to $14 (U.S.) dollars. That's about as close a license to steal as the refiners can get, and they absolutely mint money at a relationship like this.
The refiners I mentioned previously have run substantially already on the basis of this continuing disconnect, but there may be one more that might just be the best: Frontier . Its refining assets in the "mid-con" region of the U.S. are the best poised to maximize the margins from the WTI/Brent spread. Its soon-to-be merger partner Holly is the same trade in a slightly different form.
The price action of the refiners has made the analysts and the market aware of the big results that are expected from these in their first-quarter earnings reports. Where the surprise might have so far traveled under the radar is with the big integrated stocks with their refining divisions.
While unable to capture quite as well the margin disconnect of the dedicated refiners, big oil is still poised to deliver tremendous profits from their downstream divisions that have been their biggest laggard to earnings in the last 12 quarters.
This turnaround, as far as I can tell, will be a major surprise for the analysts and the Street and should lead to a big pop for the stocks. With less than three weeks to go before Exxon, Conoco and Chevron as well as a host of others start to post first-quarter earnings, it may not be too early to start loading up in front of these reports.
Refining is one of the few sectors that have actually benefited from the big move up in oil. Take advantage with the integrated and dedicated refining stocks.
Dan Dicker is a senior contributor to TheStreet.com and has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser.