Shares of North American refineries have rallied by 30.9 percent since September 2013, while the Bloomberg North American E&P Index, which tracks a basket of 48 exploration and production companies, has given up 4 percent of its value over the same period.
Source: Bloomberg, Energy & Income Advisor
These divergent moves corresponded with temporary weakness in the price of Light Louisiana Sweet (LLS) crude oil, a coastal benchmark that traditionally has tracked the price of Brent crude oil because it competes with seaborne imports from international markets.
In late September and early October, crude-oil inventories in Petroleum Administration for Defense District (PADD) 3–Alabama, Arkansas, Louisiana, Mississippi, New Mexico and Texas–ticked up because of seasonal refinery outages, depressing the price of LLS relative to Brent crude oil. (See Crude Realities: Price Volatility is Here to Stay.)
This price differential peaked at $15.56 per barrel at the end of November.
The price spread between LLS and Brent crude oil has has narrowed to $1.56 per barrel.
However, the coastal benchmark’s swoon last year served as a reminder that growing domestic production of light-sweet crude oil leaves North American crude-oil prices at risk of temporary downdrafts because of refinery outages. (See Commodity Price Outlook for 2014.)
Against this backdrop, investors have bid up shares of US refiners, an industry that stands to benefit from low domestic crude-oil prices and strong demand for diesel and refined products in international markets. Shares our favorite refiner, for example, have returned about 28 percent since we added the stock to our Focus List on Nov. 11, 2013.
Value-oriented investors should regard another swoon in the price of LLS and West Texas Intermediate crude oil as a potential opportunity to add to their positions in high-quality exploration and production companies.
Our preference: Names with strong balance sheets, low production costs, the best acreage in major plays and the flexibility to deliver their output to markets on the East Coast and West Coast.
Elliott and Roger on Aug. 27, 2018
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