U.S. refining stocks rose more than 70% over the past six months in absolute terms and 45% relative to the market, but the rally is not yet over.
A ccording to our Commodity & Energy Strategy service, the rally in U.S. refinery stocks has further to run. One of the reasons is that distillate crack spreads are extremely wide versus WTI and LLS benchmarks, indicating genuine scarcity of this product. Distillate inventories are at four-year lows and the global growth recovery will likely lead to further distillate shortages.
In addition, the Brent/WTI spread will stay wide. Cushing inventories rose by 3 million barrels over the last month, despite the ongoing increase in petroleum railroad transportation.
This highlights that transportation bottlenecks are worsening and hefty WTI discounts versus Brent are likely to persist. Finally, valuations are still attractive and profits will continue to expand.
Bottom Line: Maintain a long position in U.S. refinery stocks.