Is It Too Late to Buy Refiners? – Valero Energy Corporation (VLO), PBF Energy Inc (PBF), Phillips 66 (PSX)

It’s hard to look at the stock price performance of refiners over the past year and not think: “If only I had thrown a few thousand dollars at any one of these companies at the end of 2011.” These stocks are up so high, it couldn’t possibly make sense to buy any of them now, could it? Today I’ll take a closer look at whether or not refiners will continue to climb in 2013.

Back to the beginning
Before we figure out what’s in store for 2013, let’s revisit how we got here in the first place. It all comes down to the Brent-West Texas Intermediate spread. The price of gasoline, and many other refined products, is tied to the world price of oil. That spread is part of the explanation behind high gas prices in the U.S. despite incredibly cheap domestic oil. It is also the reason why American refiners had such a banner year. They were able to buy domestic crude at low prices and sell refined products at the world price, pocketing the difference.

In 2012, the Brent-WTI spread was above $10 for much of the year, finishing just shy of $19 in December:

Brent WTI Spread data by YCharts

But the spread doesn’t tell the whole story, because WTI is a basket of crudes, and some of them traded far below the average for much of the year. That reality allowed refiners to profit even more, provided they had access to the cheapest crudes.

Valero Energy Corporation (NYSE:VLO) is a perfect example of how the spread works. For the fourth quarter, its operating income per barrel at its Gulf Coast refineries, (processing mostly heavy imported crude) was $6.32, compared to its midcontinent refineries (processing light domestic crude) which posted net income of $14.90 per barrel.

In order for refiners to continue to outperform in 2013, they need Brent to stay high and domestic oil to stay low, so let’s take a look at how that is shaking out so far.

The spread right now
The good news right now is that the spread has persisted through the first three months of the year:

Brent WTI Spread data by YCharts

The chart above correlates nicely with the year-to-date performance of the American refiners below: