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The Secret Energy Trade Investors Are Ignoring: Western Refining Inc (WNR), Valero Energy Corporation (VLO)

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Energy has been one of the worst-performing sectors in the S&P 500 during the past year.

While the broader market is up an impressive 13%, the energy sector has gained just 2.5%. That performance looks even worse when compared with the market’s most bullish sectors, with health care up 29% and so-called consumer defensive stocks (which include makers and retailers of food and household and personal goods) up 23%.

But overall weakness in energy stocks is masking a lone group of standouts from the lackluster sector: refineries.

In fact, this group of stocks hasn’t just been strong relative to its energy peers — it has been one of the best-performing industries in the entire market in the past year. Take a look at the chart of two leading companies.

Western Refining, Inc. (NYSE:WNR)

This growth is being driven by a phenomenon known as the crack spread.

The crack spread is the profit a refiner can expect to realize from converting a barrel of oil into gasoline. This spread has been extremely profitable in the past year because of a profound divergence in the price of Brent crude from Norway and West Texas Intermediate crude.

Historically, the spread for a barrel of crude oil between Brent and West Texas Intermediate has been only $1 to $3.

But in the past few years, increasing domestic crude production and falling demand in the slow-growingeconomy has lifted that spread to record levels, with Brent at $110 a barrel and West Texas Intermediate crude trading at just $97.

And with gasoline prices at the pump tied to Brent, it has become incredibly profitable for domestic refiners to use West Texas Intermediate crude as feedstock to produce gasoline. As it stands, that trend is showing little sign of slowing. These are the kind of natural resource investment opportunities you’ll find in Nathan Slaughter’s Scarcity and Real Wealth.

That’s because the United States is continuing to ramp up crude production amid a slow-growth economy, with daily production projected to top 8 million barrels a day by the end of 2014, a 16% increase from 2012. And with limited pipeline and infrastructure to feed that West Texas Intermediate crude to the rest of the world, the domestic supply will remain swollen for years to come. That’s means there is still plenty of time to cash in on refiners.

Here is a list of six leading refiners with their market caps and forward price-to-earnings (P/E) ratios.

From the group, I have chosen to highlight Western Refining, Inc. (NYSE:WNR) because of its proprietary access to pipelines and Valero Energy Corporation (NYSE:VLO) for its dominant market position.

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